Intel is going to beat revenue in the key DCG/server segment, and beat overall Street EPS.
Intel is comp-ing an extremely easy bar with 1Q18 server shipment. The company's current server product is yielding high blended ASP y/y. Cloud capex trends were at a low point in 1H17, and in particular, the top 4 cloud capex spenders had an absolute standstill in 1Q17 capex growth. A strong 1Q18 in customer spending sets up for a very strong y/y comp.
Gross margins will be somewhat better than expected as the company moved back from plans to ramp expensive 10nm product in 1H18 and continue to use the 14nm node deeper into maturity. The shift back to 14nm will positively impact gross margins in either 1Q18 or 2Q18.
Opex is still benefiting from a y/y contraction, the lingering effects of a large headcount reduction initiated mid-2016 and completed in mid-2017.
Translation: we expect a beat and raise in 1Q. We think the stock has ~10% upside from current levels...
We see 1Q18 earnings as the last bullish EPS report for 2018
Our current thinking is that it is time to use the strength to exit positions and begin setting up positions on the SHORT side.
Here is why:
- Intel will have extremely tough DCG comps in 4Q18/1Q19
- AMD is ramping up towards d-d % market share in server through 1H19 which will have an added impact during Intel's tough server comps
- The PC supply chain is too sanguine about a bit of excess component inventory, in our view the wrong time of year to be ok carrying supply chain inventory for a category that continues to see product evolution into new territory such as Chromebooks and tablets
- At some point the ~3 year delay (and counting!) for 10nm has a material competitive impact
- There are some early supply chain concerns about disjointed order patterns in the hardware side of big data, which could create some supply chain mismatches later in the year
- With y/y revenue growth set to wax in 2018 and wane in 2019, we are betting Intel's management team will take another look at a big acquisition exiting 2018, especially as the company's balance sheet shrinks its net debt position across the year
Conclusion: we think Intel will have good news when they report this week. We think it may be the last bits of good news for a little while.
