Intel faces a 'multi-quarter' issue balancing PC weakness with AI data-center gains: Vivek Arya

[00:00:00] Speaker 1: Intel shares plunging after the chipmaker issued a weaker-than-expected forecast for the current quarter. Joining us right now is B of A Securities Senior Semiconductor Analyst Vivek Arya. Vivek, let's take a look at this. The stock is off 25% this morning. Obviously still up over the last year, but wow, that is a massive decline in one day to watch all of this disappear. You've just come out with a new note where you are cutting it, your rating on this company, to a neutral from a buy. I guess that means that even with this 25% drop, you wouldn't tell people to wade into the water at this point. What happened? [00:00:37] Vivek Arya: Yeah, thank you, Becky. Good morning. So I think the AI is not helping all boats rise at the same time. There are parts of the market that are doing extremely well that have to do with AI token demand, with AI CapEx, with cloud service growth. But what that is doing is that is creating a squeeze on the supply that is required for other parts of the market, such as consumer PCs and smartphones. And I think that is what Intel is having to grapple with, that its data center business is doing extremely well. But parts of its business that have to deal with consumer and the PCs is not doing well. And I think that is just a tough mix for the company, which has to invest in its factories to help attract external demand over the next few years. So I think it's a multi-quarter issue, which is why we thought the best thing is to wait on the sidelines and see how it makes progress in getting external customers or improving its data center business. [00:01:34] Speaker 1: Yeah, it's a big deal for the PCs. I mean, that's still 50 percent of their business, isn't it? [00:01:40] Vivek Arya: Yeah. You know, PCs is kind of the core of the company. It is an important part of their production. You know, there's a lot of IP that they share between the PC and the data center market. So, you know, it's not all, you know, being wasted. But the problem is that the exposure to the PC market is still larger than their exposure to the data center market. And within the data center market, the good news is that the demand is off the charts, right? I mean, their data center business grew the fastest in the last 15 years, right? It was up almost 60 percent year on year. Now, it's still not growing as fast as what we see from AMD and NVIDIA and a lot of the ARM-based suppliers. But it is still growing pretty fast. The problem, of course, as you mentioned, is that it is not able to offset the weakness and the sudden drop in demand, you know, because IT budgets are not growing as quickly. So if they are having to invest more in AI, that means they have less money to invest in upgrading their PC infrastructure. [00:02:37] Speaker 1: You mean their corporate customers are no longer upgrading in the same sort of cycle and fashion that they did because they're taking so much of their budget and pushing it towards AI, the new technology that's out there? [00:02:49] Vivek Arya: Absolutely. You know, there is kind of a fixed buy that customers need to spend. So a lot more is going into spending on AI tokens, as an example, right? Which is why we see off-the-charts growth in AI, right? We recently heard from Amazon, Google, Microsoft, you know, cloud business is up between 40 and 100 percent. Token demand is up by a factor of 10, you know, 10x. CapEx intentions are very strong. So I think that part of the business is doing very strong. The problem is Intel is not as exposed to that part of the economy. It is a lot more exposed to the bottom economy that is sort of on the other side, right, which is getting squeezed. And I think that's what we are seeing in their numbers and the stock performance right now. [00:03:30] Speaker 1: Vivek, we've always looked at these businesses as cyclical, that you're going to see ups and downs, not just with what you're talking about with PCs, but also with, you know, enterprise demand for AI and other things, too. There's this question right now whether the AI part is either no longer cyclical or just deals with much longer cycles. Do you think it would be right for Intel to chase the AI part of this, or do you think that eventually runs the risk of coming down where we've overbuilt? We had yesterday Gary Cohn talking about how we build out everything. Maybe we build this out too far, too. Should they stay with one foot firmly planted in the, you know, the PC business, the consumer business, the rest of this? Do you want to see them chase AI? What's your hope as somebody who follows and recommends this company? [00:04:23] Speaker ?: Sure. [00:04:23] Vivek Arya: I think, Becky, we have to differentiate between demand and near-term economics. And from that perspective, the story of what we are seeing in the broader market in AI is very similar to what we are seeing at Intel, right? So if you look at the broader market, demand for AI, as I mentioned, is off the charts. The problem, though, is that we have to spend to create this infrastructure for growth that might come over the next few years. So there is kind of a mismatch between demand and economics. I think it's the same situation or a similar situation that's happening at Intel. Their strategy is absolutely right, right? They are growing well in the data center. You know, they are investing in their manufacturing facilities. The problem is that investing in manufacturing facilities and getting the results from that is a three, four, five-year process, whereas a lot of the capex has to be front and loaded. So in some ways, I think there is kind of that mismatch between demand and economics. So I think Intel's strategy is right. It says that it's going to take time to play out. [00:05:20] Speaker 1: If it may catch up, is the demand still going to be there for AI? I guess what you're saying is you think this AI demand is here to stay and it's not going to change over the next two, three years as Intel chases it. [00:05:31] Vivek Arya: Absolutely. I think it's more than just AI demand. I think Intel is an incredibly important source of U.S. domestic manufacturing. We absolutely need diversification and chip supply. We cannot just be dependent on, you know, a handful of suppliers in Asia as much as they are very critical and they are investing in the U.S. But Intel has to be successful as kind of the leading domestic supplier. It just is going to take it time. It's going to take it multiple years. It's going to require a lot of capex yet in very early stages of that. So I think the strategy is right. I think the demand will absolutely be there because there is demand for leading edge technology manufacturing, but it's getting harder for them to match the strength they are seeing today with all the investments that have to come before they realize a lot of that demand.