Intel ((INTC) ) reported decent third-quarter results, though revenue came in modestly below management’s guidance due to shipping and supply constraints that impacted multiple segments. The firm has been experiencing a renaissance in the PC market, as COVID-19 has increased PC density (PCs per household) as more people work and learn from home. Similar to its peers, Intel’s management said demand continues to outstrip supply due to headwinds related to shortages of passive components and other supply chain hurdles. We note the firm is also dealing with a resurgent AMD that is pressuring Intel’s CPU market share, Apple’s shift to internal CPUs for its Mac PCs, and the transition from general-purpose computing to accelerated computing that relies on the likes of Nvidia’s GPUs.
Management also provided a long-term outlook that included over $74 billion revenue in 2022 (which excludes NAND sales following the unit’s sale to SK Hynix). Based on the aforementioned headwinds faced by the firm, we think this outlook is reasonable. Adjusted gross margins are expected to be in the range of 51% to 53% over the next 2 to 3 years (versus historical gross margins in the low 60s) as Intel invests in its IDM 2.0 strategy to get its manufacturing back on track and develop a more substantial foundry offering while outsourcing more products to TSMC. 2022 capital expenditure is expected to be in the range of $25 billion to $28 billion, and we anticipate further growth thereafter. Furthermore, management called for a 10% to 12% revenue CAGR over the next four to five years, along with gross margin expansion sometime in the next few years. Shares fell about 9% after-hours which we attribute to the soft margin outlook. We are maintaining our $65 fair value estimate for wide-moat Intel, as we think 2022 will be the near-term trough for margins. Intel appears undervalued to us and an attractive buying opportunity for long-term, patient investors.
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