Intel's second quarter results show a return to profitability as it recovers from the pandemic-induced PC sales boom and subsequent bust. Raymond James Managing Director and Senior Analyst Srini Pajjuri tells Yahoo Finance Live that Intel is "coming off of the lows, and things are stabilizing." Pajjuri attributes Intel's positive results to the normalization of inventory levels and supply adjustments.
Video Transcript
JULIE HYMAN: AI hype and rebound and personal computing may be breathing life back into the chip market. Intel unexpectedly returning to profitability in the second quarter with the results beating not only analysts' expectations, but the company's own guidance.
Joining us now is Srini Pajjuri, Raymond James Managing Director and Senior Analyst. Srini, it's good to see you. As Brad and I were talking about this earlier, the narrative really seems to be not that things are turning a corner and getting better, but just maybe that they're not going to get worse. How are you viewing these numbers?
SRINI PAJJURI: Yeah. So Julie, thanks for having me. First, Intel benefited significantly like many other semiconductor companies during the pandemic because of the PC boom. And then that boom turned into a bust over the last few quarters. So we are coming off of the troughs. We are coming off of the lows and things are stabilizing. From a demand standpoint, the PC market is starting to stabilize. And for Intel, they have been under shipping the end market because of the excess inventory, you know, buffer inventory of components built by customers during the pandemic. So that inventory is being worked down, so things are normalizing and looking up for Intel.
RACHELLE AKUFFO: So Srini, when you look at the recovery for PCs and data centers, what sort of numbers would you need to see to really see a convincing rebound or essentially a new normal post-pandemic.
SRINI PAJJURI: Yeah. So just to kind of give you some numbers. During the pandemic, we were looking at close to 350 million units of PC shipments per year. That has come down to about 250 to 260 million units. And our expectation is that this is not a growth market. You know, I think Intel management believes that this is a growth market, maybe low single digits at best.
On the corporate side, I think there's still a relatively stable demand. Consumer is somewhat mixed and part of it is China as well. Overall, our expectation is that it's going to be a stable market. But at the same time, we do see an opportunity for Intel and other chip suppliers because of the functionality increasing potentially. We do foresee potentially some AI functionality getting into PCs, so that helps the pricing, the ASPs because you need more powerful CPUs going forward. So that's a tailwind to Intel.
But again, our main, you know, bull case on Intel is not predicated upon the PC business. It's more on the data center side and also, you know, their manufacturing roadmap getting back on track.
BRAD SMITH: Is your base case also include them being able to maintain profitability?
SRINI PAJJURI: Of course. You know, if you look at Intel's profitability, they never lost. I mean, I think the last time they lost money was back during the, you know, financial crisis in 2009. And that was what one quarter. And that happened again in Q1 of this year. Management was forecasting another quarter of losses, but now they reported profitability this quarter.
The free cash flow is still a little bit of an issue. But even that is getting better. They're spending a lot of CapEx on manufacturing. But, you know, our expectation is that even free cash flow will turn positive second half of this year, and that should also help the stock going forward. But profitability and free cash flow is very important for us.
JULIE HYMAN: So, Srini, if you're focused on demand and data centers in particular, the company did say sales were down 15% year over year in that division. What's going to change there that's going to help demand?
SRINI PAJJURI: Yeah. So look, I think, again, even data center is another market that benefited significantly during the pandemic because the work from home partly. And then now we are seeing a lot of investments going to AI and machine learning. AI requires specialized processors, you know, GPUs and accelerators.
Intel doesn't have a strong position currently in that market. That's dominated by Nvidia. And as the spending is shifting to AI related, you know, workloads there is an impact on the CPU market where Intel is the dominant supplier.
But at the same time, you know, the cyclical correction, the cyclical headwinds are fading even in data center CPUs. And our expectation is that longer term, AI will benefit not only GPUs, but also CPUs. But in the short-term, there is some impact, and that's the reason. But even with all those issues, Intel's numbers were better than expected even in data center. So I think that's the reason the stock is reacting positively today.
RACHELLE AKUFFO: And, Srini, as we look at the AI story, I mean, on the earnings call, we saw from Pat Gelsinger saying that Intel plans to build AI into everything that they build. But as Sean Hollister from The Verge says, Nvidia is selling the right kind of shovel in this AI gold rush. How should we think about how Intel is positioning itself in this?
SRINI PAJJURI: Yeah. So it's a very interesting market. I mean, AI is not new. AI has been around for several years. What changed since last year is the ChatGPT, what we call the large language models. This is generative AI. So most of the generative AI applications are today are run in the cloud. You have to train these massive models and you need a lot of compute. And that's only available in the cloud. You can't simply do that in edge devices like PCs or servers.
So initially, we expect most of the investment to be in data centers as a result, but as applications emerge, it's possible that we'll see local processing of AI applications, especially as we deploy some smaller models. There's a lot of talk about, for example, personal assistants. Do you need to go back to the cloud every time you ask the personal assistant something, right?
So if you have an application on your PC or on your smartphone, you will need more powerful processors to run those PCs and smartphones as well. So there is an opportunity there.
And Intel also participates in other markets in 5G infrastructure, for example. So there's an opportunity to use AI applications. I mean our view is that AI will be in pretty much every application that we use every workload, so anywhere there is compute and, you know, Intel participates in that market. And I do see a benefit longer term, but for short-term, I think most of the spending is going to GPUs.
RACHELLE AKUFFO: Indeed. Well, great having you on with your insights. Srini Pajjuri there, Raymond James Managing Director and Senior Analyst, thanks so much. Have a great weekend.
