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THE HEADLINE
“The first move is always wrong.”
That’s what I thought of Intel’s earnings reaction last night, especially as we woke up to see the stock give up all its overnight gains and trade in the red.
Down over 3% on what seemed like a good quarter…
Like Google’s earnings announcement, Intel is getting punished for very similar reasons.
Here’s what the headline tells you:
25% revenue growth
Gross margins up 12.9%
Net operating income, massive improvement from its previous losses
59% data center and AI growth
All of this came with the expected “unprecedented demand” commentary out of management.
Truth be told,
This is an outcome I had priced in last year when I gave you Intel at $20 in my Twitter.
Now that the best of news are in the stock price, I’m having a hard time figuring out why anyone would buy this.
The question isn’t whether Intel is growing…
It’s why stronger operations are creating weaker shareholder economics?
With all this massive data center, AI, and operating income growth… It’s hard to think that the business would post worse net losses.
Yet it did, and that’s not all.
Intel also issued a ton of stock and debt to keep financing other areas.
Only that they are not financing business related areas, they’re financing NVIDIA’s balance sheet by distributing cash flow to them as “partners.”
In other words,
Intel’s business is improving much faster than what most people realize.
Ironically,
That’s not the part that worries me anymore
It’s the one accounting choice that threatens a pullback of over 50% from here.
That’s what we’ll cover today.
(don’t forget to grab your free analysis copy below.)
THE GOOD, BAD, AND UGLY
Everything above Net Income (loss) is fantastic.
And typically, I’d be the first to defend a business whose operating income is outpacing net income any day.
So long as it is outpacing for reasons that won’t hurt the business down the line, and are being exaggerated by the market.
However,
In Intel’s case, the mismatch between operating and net income is due to a very malignant item that could blow up the entire company if not managed correctly.
The worst part?
Markets are overpaying for that item, making me want to avoid this name even more…
Don’t be surprised to see more and more technology companies get punished by that “other income” item of the financials.
NVIDIA, Amazon, Google, Micron, AMD…
All of them are involved in the same circular financing madness that I’ve broken down before.
Leading to a massive disconnect, of over 200% in some cases, between operations and net cash.
In this case, Intel lost $12.5 billion inside that item.
Here are the details for it:
In reality, Inte’s quarter should have been closer to $0.42 per share.
Still, that non-cash item losing them over $12 billion is something that will eventually come due:
Losses on Escrowed shares
This is the deal Intel made with the US government through the CHIPs Act, and with NVIDIA for them to finance chip buying.
Absolute insanity.
Because these escrowed shares lost value, whether by redemption or new assessment, the company destroyed $12 billion of shareholder capital.
That’s not all.
Intel took on $13 billion of additional debt this quarter.
Why?
So they could pay $14.3 billion to the government and NVIDIA’s partnership.
They only reinvested $2.6 billion back into capex, which is even worse than what Google did.
In simple terms,
Buying Intel is indirectly giving your money to the government and NVIDIA.
Let’s break down the biggest bull case right now after Intel’s earnings:
Make no mistake, Intel is still in the foundry business.
They just happen to have monetized a short wave in data center products and made $4.8 billion this quarter.
As I broke down already, data center construction is down to 5% annualized growth.
Meaning,
When we return to normality, all of Intel’s businesses (especially foundry) still operate at a deep loss.
That’s why management is guiding for weaker EPS next quarter.
Everyone will tell you this guidance is bullish (because they compare it against today’s headline), but adjusting earnings for real cash, you know this guidance is actually very bearish.
All told:
Intel is destroying shareholder capital and taking on debt to pay NVIDIA and the government
Their operating numbers only recovered due to data centers (not a core business)
A return to normal would reflect the fact that all other core businesses are still losing money
I would therefore avoid this stock altogether, until it is clear that a new narrative could come and help it.
After riding it from $20 to $100 per share, I have very little interest to keep following it for a while.
What I do have a lot of interest in is the fact that software (like Adobe) and HALO names are doing amazing today while all the semis/memory names sell off.
I will be ramping up my research in those areas, and deliver my best ideas to Premium members.
That’s all for tonight folks.
Until next time,
OFFSIDE RESEARCH
Against the Tape, Ahead of the Curve.