Bernstein Research Managing Director and Senior Analyst Stacy Rasgon joins Yahoo Finance Live to discuss Intel earnings, slowing PC demand, the risk of a recession, and the outlook for Intel.

Video Transcript

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- Intel beat expectations yesterday after the bell, but it reported its largest quarterly loss in company history, coming amid a steep decline in both PC and data center sales as consumers and businesses pull back on spending. Joining us now is Bernstein's Stacy Rasgon, who covers US semis. And, Stacy, the title of your note, I have to say, gave me a little chuckle this morning. When you're already on the ground, it's easier to look up.

In other words, things are pretty bad for Intel. So even some kind of little marginal improvement is seen as good news by the market. Is there going to actually-- do you think that improvement is going to materialize?

STACY RASGON: Yeah. So, look, stocks are-- it's a matter of expectations, which is expectations versus reality in that gap, which is what drives stock prices. And, look, don't get me wrong. Objectively this was a horrible quarter. And the guide objectively relative to where they had been running for many, many years was horrible.

However, they set the bar much lower than that. And expectations have been rock bottom. And that's sometimes, that's all it takes. I mean, the big question people are trying to answer on Intel is is it as bad as it can get? And from what we heard last night, the answer to that plausibly could be yes. It could be as bad as it could get.

They are looking for a bit of a recovery in the back half. They used the word "modest," although there is enough there to maybe believe that it could be better than modest. They've got people excited now about gross margins getting back to 40%, which, again, is an unbelievable kind of statement. You never would have thought they'd be this low in the first place.

But we're at the point now where I think you can plausibly make the case that we'll see how long it takes for things to get better. I don't know. But hopefully things can't get worse from here. And that's why the stock is up today. Even in the midst of a horrible quarter, expectations were even lower. Sometimes that's all it takes.

- Yeah, Stacy, that was my question. So the stock is up 6%. Is it because they've reached bottom and it's only up from here?

STACY RASGON: Well, we'll see if it's up from here or not. I don't know. But they probably have reached bottom. Q1 was so bad. I think everybody's been bandying about this the biggest quarterly loss in their history. Yeah, it doesn't really get much worse than that.

Revenues collapsing. They did beat expectations, by the way, because they set the expectations so low. But, I mean, revenues were down a ton. They were down I think both their PC and their data center businesses were down almost 40% year-over-year.

Gross margins are now well into the 30s. Free cash flow, they burned $9 billion in free cash flow in the quarter. I mean, it was pretty horrendous.

Q2 is going to be bad, but it won't be quite that bad. And they're looking for things to get better in the back half. So yes. And beyond that, call me in a few years. We'll see.

- What's--

- Go ahead.

- What's the risk to that? You said in second half of the year, a recovery is plausible in the second half of the year. But what's the risk? What if we hit a hard landing, a recession?

STACY RASGON: Yeah, so let's talk about what's driving some of that back half. So in client, so if you go back to last couple of years, PCs, as we know, were very strong. CPUs, the things that Intel ships, they were actually overshipping PCs by a very wide margin because of all the shortages and everything else that we had.

So now PCs have corrected. And their shipments have gone from overshipping now to undershipping. And they think in Q1, they actually undershipped the market by 20%.

So that doesn't last forever. And so even if PCs didn't grow, at some point, you go from undershipping by 20% to shipping in line. That's actually a pretty material lift, half over half, right, if that normalization happens. And it should happen at some point.

In data center, again, it's been very weak. Enterprise in China have been weak for quite a while. They've probably hit bottom. Those may start to get better. They've got new products that are launching in the back half with higher prices. They talked about little green shoots in China maybe. So, again, plausibly you can argue that can get better.

What would be the risk to this? Clearly there's a demand and a macro statement. Yeah, if we hit a hard landing and they're looking for PCs for the year to come in around 270 million units, I'm closer to 250. But fine. What if they were 220 because macro was horrible? That would be a risk. That's not strictly an Intel risk. That would be like in everybody risk.

- But some of this stuff is an Intel risk, right? Some of this stuff has nothing to do with the macro. It's Intel specific, right? So how do they fix that stuff? Do you feel like Pat Gelsinger is on the right track here?

STACY RASGON: I don't know yet. It depends, right? So in terms of fixing things, like I said, things were already bad. It's hard for them to get worse.

And some of what we're seeing in terms of the low revenue is because they are flushing out inventory from the channel. They are undershipping and demand. That should get better once the channel inventory is normalized. So that's something that they're doing, which is OK.

But I'd say on the client side, on the PC side, their roadmap looks pretty good. And on the data center side, the products have been delayed, but those products are finally ramping. They have new products that are coming next year.

They had a data center event a few weeks ago, where they talked about that being on track. Maybe those will slip. I don't know. I don't have a ton of confidence. But if they do slip, they don't have to tell us about it for almost a year. So at least for the next probably four quarters, everything's going to look like it's on track.

In terms of the broader strategy, so, look, they're investing a ton of money. They're trying to build a third-party foundry business and everything else. It's painful. Now, you could argue it's the right strategy in the sense that if Intel wants to have a robust and viable company 5 years, 10 years down the line that is competitive with the best in the world, they're probably doing the right thing. They have to invest heavily to do that.

Their mistake was setting expectations so high. I don't know why Pat came in and just sounded so bullish. He should have come in and said, look, we think we're on the right path, but you guys have to be patient. It's going to be a slog. And they didn't really do that.

But if that's the goal, that's the right strategy because their alternative is to lay down and die, right? Turn it into IBM. We're not going to invest. We're just going to manufacture earnings and just manage a business in decline.

That is a model. You can run a company like that. That's not what Pat came in to do. And that's not what the strategy is.

So in 5 years or 10 years, maybe this is the right strategy. But the problem is we won't know if it's going to work for five years. That's the biggest problem with owning the stock structurally here. Even if it's off the bottom-- we upgraded it a few weeks ago on exactly this thesis, that probably it can't get any worse.

But doesn't mean I want to own it because the problem is I have no idea what the company looks like in five years. It's impossible to know at this point. And given that uncertainty and the fact that even if what they're doing is the right thing, the chances of success are not guaranteed. I think it's a hard thing to own structurally.

- Stacy Rasgon, Bernstein Research analyst with a market perform rating and a $30 price target on Intel. Thanks so much for joining us.

STACY RASGON: You bet.