Here's why Intel's stock just dropped 10% after reporting earnings

Alex Wilhelm
·3-min read
PETAH TIKVA, ISRAEL - JANUARY 15: An Intel chip is seen in a circuit board being built at an ECI Telecom high-tech plant January 15, 2003 in Petah Tikva which is located in central Israel. ECI Telecom, which specializes in telecommunication networking solutions, is placed amongst the 10 leading companies in Israel with its sales in excess of US$1.2 billion last year and employs over 3,500 employess worldwide. (Photo by David Silverman/Getty Images)
PETAH TIKVA, ISRAEL - JANUARY 15: An Intel chip is seen in a circuit board being built at an ECI Telecom high-tech plant January 15, 2003 in Petah Tikva which is located in central Israel. ECI Telecom, which specializes in telecommunication networking solutions, is placed amongst the 10 leading companies in Israel with its sales in excess of US$1.2 billion last year and employs over 3,500 employess worldwide. (Photo by David Silverman/Getty Images)

The third-quarter earnings cycle is just getting underway, but we've already seen a few companies post numbers that investors did not like. Netflix missed on several metrics yesterday and was punished, and today Intel is joining the video streaming giant in stock-market purgatory.

Intel shares are off around 10% in after-hours trading after the chip company reported its Q3 data. Investors had expected Intel to report an adjusted $1.11 in per-share profit, off around 22% from the year-ago period. They also expected it to report revenues of $18.26 billion in Q3, down a more modest 5% compared to the year-ago Q3.

Notably, Intel beat revenue expectations with top line of $18.3 billion, and met earnings-per-share estimates of $1.11, on an adjusted basis.

So, why are Intel shares sharply lower?

Quick consensus appears to point to weakness in the company data-focused business unit, the smaller of Intel's two halves (the other focuses on PC chips). Inside the data-side of Intel, its Data Center Group (DCG) had mixed results, including cloud revenue growth of 15%. However, at the same time, the DCG's "Enterprise & Government" business shrank 47% compared to the year-ago period, following what Intel described as "two quarters of more than 30 percent growth."

Off that weakness, the resulting top line miss was sharp, with the market expecting $6.22 billion in revenue and DCG only delivering $5.9 billion.

Intel blamed COVID-19 for the weak economics conditions at play in the result. The company also highlighted COVID-19 when it discussed results from its internet of things business and memory operation, which declined 33% and 11% on a year-over-year basis, respectively.

Perhaps due to COVID-19's recent resurgence in both North America and Europe, investors are concerned that the macroeconomic issues harming Intel's growth could continue. If so, growth could be negative for a longer period than anticipated. That perspective could have led to some selling of Intel's equity after the earnings report.

Could guidance have a part to play in Intel's share price decline? Probably not. Better than what it reported for Q3 2020, Intel's forward guidance shows a small revenue beat versus expectations, and a small profit beat as well. Intel forecasts revenues of $17.4 billion for Q4 2020 and adjusted earnings per share of $1.10, while the street was looking for $17.34 billion in top line and adjusted earnings per share of $1.06.

Given that Intel is prepped to best expectations in Q4, it's hard to pin its share-price declines on guidance. That leaves the weakness in its data business as the most obvious culprit.

It is dangerous to over-describe why a stock or a group of stocks move at any given time. But in this case, it seems plain that the revenue miss inside Intel's data business was at least a portion of why it shed value. As to whether the company's COVID-19 notes are valid is up to you and how you handicap the broader economy.