Intel Earnings To Watch: Margin, Foundry, Data Center
Global chip giant $Intel(INTC)$
Option Market Signals
With Intel set to report its much-anticipated Q3 earnings after the bell this Thursday, the options market is flashing clear and aggressive signals. The positioning is not one of cautious hedging but rather one of strong directional speculation.
The most telling metric is the Put/Call Ratio of 0.67. This low reading, which has been trending down with the stock's recent rally, shows that for every 67 open put contracts, there are 100 open call contracts. This reflects a significant bullish bias, with traders overwhelmingly betting on a positive outcome or a continuation of the stock's powerful upward momentum. The rising open interest in concert with the rising price further confirms that new money is flowing in to support this bullish thesis.
However, this optimism comes at a very high price. The market is bracing for fireworks, as evidenced by an Implied Volatility of 78.03%. The 94th IV Percentile is the critical number, indicating that options are more expensive now than they have been 94% of the time over the past year.
This combination of a low Put/Call ratio and sky-high IV paints a picture of a market coiled for a violent move. Traders are heavily positioned for an upside breakout, but the extreme premiums they are paying mean the bar is set exceptionally high for Intel to deliver.
Core Financial Indicators
~Revenue: The Q3 consensus estimate is $13.14 billion, representing a 1% year-over-year (YoY) decline but a 2% quarter-over-quarter (QoQ) increase. This is slightly above the company's prior guidance midpoint of $13.1 billion.
~Gross Margin: The Street expects a GAAP gross margin of 35.6%, a significant improvement of 20.6 percentage points YoY and 8.1 percentage points QoQ. The non-GAAP gross margin forecast is 36% (up 18 percentage points YoY, up 6.3 percentage points QoQ), consistent with the company's guidance.
~Profit: A GAAP net loss of $1.0 billion is anticipated, which would mark the seventh consecutive quarter of losses. However, on a non-GAAP basis, the market expects a net profit of $33.83 million. This signifies a return to profitability both YoY and QoQ, surpassing the company's previous guidance of break-even.
Three Things to Watch:
1. Can Raptor Lake Price Hikes Offset Margin Drag from Lunar Lake's Memory Costs?
Supply-chain reports indicate that Intel is implementing price hikes of over 10% on select Raptor Lake CPUs in the fourth quarter. These chips, which span the 13th and 14th Gen Core families, are built on the mature 'Intel 7' process. If executed, these price increases could provide a significant boost to ASPs and gross margins for the Client Computing Group (CCG) heading into the seasonally strong holiday quarter.
However, the memory sector has entered a price up-cycle this past quarter, driven by structural capacity mismatches and surging AI demand, leading to notable DRAM price increases. Intel's management previously flagged that Lunar Lake CPUs, which integrate DRAM packaging and are slated for high-volume shipment in Q3, would be a significant drag on gross margins. The question now is whether rising DRAM costs will exacerbate this margin pressure.
2. With 18A Progressing, Will Management Revise Its Foundry Strategy?
On the last earnings call, management stated that Intel 18A and 18AP remain key nodes for the company's next three product generations. They suggested that internal products alone could generate a reasonable return on 18A investment, implying external customers might not be essential. Furthermore, Intel 14A (slated for 2028/2029) would be a foundry node from inception, but investment would be contingent on securing orders. The market interpreted this as a significant shift, seemingly deprioritizing the foundry strategy.
However, Intel recently announced major progress on its 18A process, citing improving yields. The company claims Panther Lake, its first 18A-based notebook CPU, will ship within 2025 and see broad availability by early 2026. Critically, following the U.S. government's investment, stipulations were placed on Intel's foundry ownership, preventing the company from relinquishing control of the business.
3. When Will the Data Center Market Return to Growth?
Intel has largely been seen as a laggard in the current semiconductor AI boom. Its 'Datacenter and AI' (DCAI) group derives the vast majority of its revenue from traditional server CPUs rather than AI accelerators, making the name somewhat of a misnomer. Even within its core server CPU market, Intel faces relentless competition from $Advanced Micro Devices (AMD.US)$ , which has steadily eaten away at its dominance, growing its x86 server market share from less than 5% to over 40% in recent years.
Following Nvidia's investment aimed at strengthening X86 collaboration, the market is anticipating a recovery for Intel in both arenas, though the process is expected to be lengthy. Consensus estimates project Intel's Q3 data center revenue will decline 4% YoY, potentially falling behind AMD's.
Recent media reports suggest Intel plans to create an efficient, heterogeneous AI system by combining its own Gaudi3 AI accelerator with Nvidia's B200, an apparent effort to salvage its struggling AI chip business. Investors should monitor the earnings call for management's outlook on its AI accelerator roadmap.
Summary
In summary, the Q3 report itself is expected to have few highlights. The market is more focused on strategic shifts in the foundry business and the company's roadmap for profit improvement by 2026. If the foundry segment delivers a positive surprise, it could also provide a lift to the U.S. semiconductor equipment sector.
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