Intel announced fantastic 2Q results after the close today. Revenue of $16.1B was up 25% and crushed analyst estimates of $14.5B. Prior guidance had been for $13.8B – $14.8B. Adjusted EPS of $.42 was also far above analyst estimates of $.22. Prior guidance had been for $.20. Gross margin of 40.4% was above last year’s 27.5%.

Guidance was excellent:

• 3Q revenue of $15.8B – $16.8B vs analyst estimates of $15.2B.
• 3Q gross margin of 41% GAAP and 42% Non-GAAP (improvement vs 2Q).
• 3Q adjusted EPS of $.38 vs analyst estimates of $.28.

 

2Q CFFO of $7.0B was also fantastic.

Client computing revenue (the consumer x86 business) of $8.9B was up 13% and was above estimates of $8.0B.

Data center revenue (the server business) of $6.3B was up 59% and was above estimates of $5.5B.

Foundry revenue of $5.8B was up 31%. The press release highlighted that Intel is building a next-gen security processor for Fortinet, something that was announced two days ago. This wasn’t in the press release, but there are widely disseminated rumors that Google has placed an order for 3MM TPUs to be produced in the 18A plant. This also came up in an expert call I did earlier today. Continued collaboration with Google Cloud was mentioned in the press release.

130 Customers are adopting or testing Intel Core Ultra Series 3 processors for edge AI and robotics. (I’m a fan of the Core Ultra line and the specs on the gen 3 processors are excellent. The processor in my laptop is the Core Ultra 7 255HX.)

Intel foundry started 18A-P production, an improvement over the 18A standard.

 

Core Ultra Series 3 is in high-volume production in the 18A plant. Intel had Taiwan Semiconductor manufacture the Series 2 line last year. Bringing that back in-house was a risk that has paid off.

 

The Foundry business still lost money but losses were $1.1B lower than last year. Still work to do, but clear improvement.

 

Yields in 18A have been above expectations which were set in March. (There have been rumors that yields are in the 80% – 85% range which, if true, would be fantastic. This also came up in an expert call I did yesterday, something posted to the DKI premium blog then.)

 

There were multiple positive comments on 14A progress. They expect to start production in 2027 and be at high-volumes in 2028. This is a huge step given that previously, Intel had said they wouldn’t spend money developing 14A if they didn’t have sufficient external customer interest.

 

The 18A Fab plant is improving efficiency. Panther Lake costs have gone down 50% so far this year with an additional 20% expected in 2H ’26 and further improvement in ’27.

 

They still have supply issues that they think won’t be resolved for another quarter, soemthing discussed on the last conference call. Improvement in this area would provide a lift to 4Q revenue. The company has been clear that if they had additonal supply, they’d be able to sell more.

 

The (sort of) negatives:

 

Like others in the industry, they think PC sales will be down in 2H due to high memory costs. I’ve been tracking laptop prices and they are up in the past 3-5 months, especially for models with 32GB or more of RAM. Still, a quick browse through Best Buy’s available options still show some well-speced models around the $1,000 range. That’s good given how much the processors have improved.

 

The stock had been up in the 7% -9% range in aftermarket trading during much of the call, but was up in the 4% – 5% range towards the end of the call. That’s because the new Cap-x plan is up a significant amount to $20B due to higher demand and increased sales. The 2027 Cap-x plan is substantially above the ’26 plan.

 

I differ with the market on this interpretation. Intel cap-x was $25.8B in 2023, $23.9 in 2024, and $14.6B in 2025. The plan had been for ’26 cap-x to be flat to down from last year. The reasoning was the company didn’t want to spend more if there wasn’t enough demand to justify that additional spending. Now that demand is greater than Intel’s ability to produce, the 18A plant is producing yields above expectations while attracting outside customers, and there company is going forward with 14A, they’re increasing the cap-x plan to match the increased demand. People are entitled to their own view, but if lower cap-x due to a lack of demand was a problem then higher cap-x due to huge increases in demand shouldn’t also be a problem.

 

I suspect the real reason behind this stock movement relates to general concerns about unprofitable AI spending. The hyperscalers and LLM developers have been spending trillions of dollars on AI models and datacenters without a clear plan to earn a return on that spending. Earlier this week, Google stock fell when they announced a great quarter combined with increased AI-related cap-x spending. The market is now focusing on a return on capital rather than just unlimited AI growth forever. This is something DKI has been writing about for more than a year.

 

However, I view Intel’s spending differently. The hyperscalers are building datacenters without a clear revenue plan and which may result in a negative return on captial. Intel is spending money on profitable business to meet demand that exceeds its current capacity. Supporting this point was recent stock market trading when a new Chinese LLM announced capability that matched that of the best US models with much lower token costs. The entire sector including Intel fell in the following day’s trading. However, while lower AI token costs and projected lower LLM revenue is a negative for companies like Google and OpenAI, these same lower token costs increase demand for AI which is a positive for companies like Intel. It’s going to take a lot of CPU power to handle the additional queries. The market has a habit of bundling these companies and this spending together while I see them as fundamentally different.

 

I’m also less concerned than most about the projected weakness in laptop sales. Intel is unable to meet demand now, and if some revenue shifts from the consumer business to the datacenter business, that’s not something that I see as a negative. We’ve also been tracking some new technology that makes inexpensive flash memory perform like expensive high-bandwidth memory and the DRAM companies are increasing capacity now. If memory prices remain high and DRAM availablity remains low, the reason for that would be continued massive datacenter buildouts, something that benefits Intel.

 

DKI first bought Intel last November around $35. I remain positive on the name and today’s results confirm our positive thesis. We recently closed a covered call position with profits of more than 100% in one month. We’ll be looking at initiating a new one and should I take a position personally, I’ll disclose that in real time on the DKI premium blog.

 

As always, I’m reachable at IR@DeepKnowledgeInvesting.com if you have questions.

 

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