Intel Still Facing Supply Constraints

Jon C. Ogg

Intel Corp. (NASDAQ: INTC) has had ongoing issues with processor delays on deliveries to customers. The company recently seemed to appease investors somewhat with earnings, noting that revenues for the full year would be about $1.5 billion higher than expected at $71 billion, and the earnings per share guidance was raised to $4.60 per share from $4.40. Its shares rallied as investors were beginning to see a better scenario around strained chip supplies and weaker demand.

It appears as though some of Intel’s customers are still not satisfied with Intel’s ability to raise its output to meet demand. Intel released an SEC filing that included a letter to the company’s customers and partners. Michelle Johnston Holthaus, EVP and general manager of the Sales, Marketing and Communications Group, wrote that Intel has not yet resolved the challenges to improve its supply-demand balance on its products. Despite added capacity, sustained demand growth has outpaced its ability to increase supply.

Intel’s shares have traded off slightly as a result of the letter, and it likely is a win for Intel’s rivals. Some of these issues tie in to why some investors should be worried about how high analysts have chased up the stocks in this space.

While the news is an obvious disappointment, Intel did reaffirm its previous guidance for the fourth quarter issued in its earnings release dated October 24, 2019.

The November 20 letter from Intel to its customers and partners said:

I’d like to acknowledge and sincerely apologize for the impact recent PC CPU shipment delays are having on your business and to thank you for your continued partnership. I also want to update you on our actions and investments to improve supply-demand balance and support you with performance-leading Intel products. Despite our best efforts, we have not yet resolved this challenge.

In response to continued strong demand, we have invested record levels of Capex increasing our 14nm wafer capacity this year while also ramping 10nm production. In addition to expanding Intel’s own manufacturing capability, we are increasing our use of foundries to enable Intel’s differentiated manufacturing to produce more Intel CPU products.

The added capacity allowed us to increase our second-half PC CPU supply by double digits compared with the first half of this year. However, sustained market growth in 2019 has outpaced our efforts and exceeded third-party forecasts. Supply remains extremely tight in our PC business where we are operating with limited inventory buffers. This makes us less able to absorb the impact of any production variability, which we have experienced in the quarter. This has resulted in the shipment delays you are experiencing, which we appreciate is creating significant challenges for your business. Because the impact and revised shipment schedules vary, Intel representatives are reaching out with additional information and to answer your questions.

We will continue working tirelessly to provide you with Intel products to support your innovation and growth.

Shares of Intel closed down 0.77% at $57.90 on Wednesday, with close to a 1% drop to $57.40 in the after-hours trading session.

Shares of Advanced Micro Systems Inc. (NASDAQ: AMD), which competes directly in PC processing, was down 0.75% at $40.98 on the trading day but was up the same amount and back at $41.30 after the letter was disseminated.