Intel (NASDAQ:INTC) is going to need a beat when it reports third quarter earnings on Thursday afternoon. Down 21% from early June highs, INTC stock needs a surprise to get shares moving back in a positive direction.
But those earnings will matter to more than just Intel stockholders. The entire chip sector has been in freefall of late. The PHLX Semiconductor Sector Index (INDEXNASDAQ:SOX) is down almost 14% in that same period. And two of the big names in the space — Nvidia (NASDAQ:NVDA) and Micron (NASDAQ:MU) — aren’t reporting any time soon.
That’s part of why I argued last Friday that Intel’s earnings report was one of the three biggest in the entire market this week, along with those from Amazon.com (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).
Intel will be a big report. But I’m not yet convinced the news is going to be good. The June highs looked too high from my perspective. The pressure in the chip space makes some sense. The worst may be behind INTC stock and the semiconductor space. That doesn’t mean, however, that happy days will return just yet.
Intel Stock Ahead of Earnings
There’s a simple, though not easy, path for Intel shares to jump coming out of earnings. Sentiment toward INTC stock has moved steadily south after the last few months. Q2 earnings — despite coming in ahead of consensus — led INTC lower. Investors and analysts clearly are worried that delays in the chipmaker’s 10nm production ramp are opening the door for rival Advanced Micro Devices (NASDAQ:AMD). And as I wrote last week, some are beginning to question whether the semiconductor business still is or isn’t cyclical.
An Intel earnings beat could rebut all of those concerns. The status of the 10nm ramp no doubt will be a key focus on the earnings conference call. Strong commentary from the company on the chip’s progress could calm investor fears. Another earnings beat, at these levels, should be met with more optimism than the Q2 numbers were. And if Intel shows strength in datacenter — where AMD and Nvidia are trying to take share — and automotive, evidenced with an update on its $15 billion Mobileye purchase, it could reset the cyclical debate about the stock.
INTC stock is not going to rally 20% on a single report and retake all of the losses since June. But there is an obvious way in which Intel can at least reverse the current trend: Beat consensus estimates; show strength in datacenter; and, detail progress on the 10nm front. That combination moves Intel stock higher after earnings, and changes the narrative around INTC.
INTC Stock and the Chip Space
There are two obvious headwinds toward a post-earnings rebound in INTC stock. The first is that Intel may not be able to meet its internal goals. An earnings beat isn’t guaranteed (though recent history suggests otherwise: Intel hasn’t missed on the bottom line since 2015). The 10nm ramp remains an issue, as does competition from AMD. PC sales appear to have weakened, and Nvidia, in particular, is coming on strong in datacenter, with 83% growth in its fiscal Q2.
The second headwind is beyond Intel’s control. Given the cyclical concerns in the space, a strong report may not be enough. Micron beat with Q4 earnings and the stock kept falling. Nvidia did the same. The market is not just focused on three months at a time. Anything less than a monster quarter may not be enough to dislodge the market’s current bearishness.
But that’s also a key reason why investors who don’t own INTC stock need to watch Intel earnings closely. The reaction to the quarter could provide a signal to the rest of the sector — and maybe tech as a whole. If Intel beats, and investors shrug, then there may be little that chip stocks can do at the moment to convince investors. (In that context, AMD earnings later today should be considered as well.)
However, if investors see earnings as good enough to buy the dip in Intel stock, that could signal a similar willingness for NVDA, MU, and other chip plays. And it would be a signal that, at least in the near term, the chip sell-off may be nearing an end. That’s why Intel earnings matter not just to INTC stock but to so many of its semiconductor rivals. Something needs to stop the chip sell-off. If it’s not earnings, there’s not much left.
As of this writing, Vince Martin has no positions in any securities mentioned.
