BMO Downgrades Intel As Gross Margins Slip

Intel Corporation INTC’s analyst day detailed positive prospects for free cash flow, capital allocation, and operating margins. But insight on gross margins was startling.

The Rating

BMO Capital Markets analyst Ambrish Srivastava downgraded Intel from Outperform to Market Perform and cut his price target from $68 to $50.

The Thesis

Intel expects gross margins to fall between 57 percent and 60 percent due to pricing headwinds, its 10-nanometer transition and 7-nanometer ramp, and the expansion of adjacent businesses. Competition from Advanced Micro Devices, Inc. AMD also pressures the metric.

“AMD is having an impact on the business, and it has barely begun shipping its server products, and will likely have a bigger impact than clearly we thought on Intel's margin structure – and likely what Intel thought as well,” Srivastava wrote in a note. “Intel looks to be responding with a mix of a strong product rollouts coupled with what seems to be an aggressive pricing strategy to counter the AMD threat, in our view.”

But it’s still paying a price.

“Semi stocks do not do well in a decelerating GM environment, particularly when the bottom in margin is [about] two years away,” Srivastava wrote. He forecasts a gross-margin nadir after 2021. “[...] That is a far ways away, even for us, where we typically are patient and tend to take a longer-term horizon.”

Price Action

At time of publication, Intel shares traded down 3.3 percent at $47.60.

Related Links:

Bank Of America Upgrades Qualcomm, Highlights Improved Visibility

Analysts Impressed With AMD's Execution, Pipeline Following Solid Q1 Results