Bernstein Interpretation: Intel fell about 20% after hours, as server growth couldn't offset the decline in PC business
TL;DR
Third quarter revenue was $16.513 billion, basically in line with expectations; adjusted earnings per share were $0.52, higher than the market expectation of $0.40.
Data center and AI business revenue was $7.318 billion, exceeding expectations, but client business revenue was only $8.097 billion, significantly below expectations.
Fourth quarter revenue guidance is $15.5 billion, about 9% lower than market expectations; earnings per share guidance is $0.25, about 42% lower than expectations.
Client business revenue in the fourth quarter is expected to decline more than 20% quarter-over-quarter, with weak demand and inventory adjustments expected to continue into the first quarter of 2027.
Fourth quarter gross margin is expected to drop to 38%; even excluding the approximately 2 percentage points impact from the wafer fab incident, it is still below market expectations.
Bernstein maintains a "Market Perform" rating and a target price of $110, believing that headwinds in the PC business may continue to suppress the stock price.
Intel's third quarter earnings improvement did not alleviate market concerns about the next quarter.
According to Bernstein's preliminary performance review, Intel achieved revenue of $16.513 billion in the third quarter of 2026, which is basically in line with market expectations; adjusted earnings per share were $0.52, higher than the expected $0.40. However, the fourth quarter guidance provided by the company is significantly weaker, with revenue, gross margin, and earnings per share all substantially below market expectations. As of the time of this report, Intel's stock price fell about 20% in after-hours trading.
The performance pressure mainly comes from the PC business. Storage shortages have already affected third quarter client revenue, while the combination of weakened demand and inventory adjustments in the fourth quarter means that growth in the server business is still insufficient to support the company's overall performance.
### Third quarter earnings exceeded expectations, business differentiation has emerged
Intel's third quarter client computing group (CCG) revenue was $8.097 billion, below market expectations of $8.819 billion, with a gap of about $722 million. Meanwhile, data center and AI business (DCAI) revenue reached $7.318 billion, exceeding market expectations of $6.675 billion, basically offsetting the revenue gap from the client business.
Server demand remains strong, and supply has improved, but Intel stated that demand is still far above supply.
The performance on the earnings side is more positive. The third quarter gross margin reached 44.1%, higher than the market expectation of 42%, mainly driven by improvements in Intel 3 and 18A process yields, as well as product mix improvements. Operating expenses were also lower than expected, driving operating profit to $3.234 billion, higher than the market expectation of $2.697 billion.
Additionally, the actual tax rate of 11% was lower than the market expectation of 19.4%, further supporting earnings per share. Therefore, this earnings surprise includes contributions from manufacturing and product mix improvements, cost control, and a lower tax rate, and cannot be entirely attributed to terminal demand growth.
### PC inventory adjustments intensify, fourth quarter revenue expected to decline quarter-over-quarter
Intel expects fourth quarter revenue to be $15.5 billion, below market expectations of $17.03 billion, a decrease of about 6% from the third quarter; adjusted earnings per share are expected to be $0.25, significantly lower than the market expectation of $0.43.
The client business is the main drag. According to Bernstein's calculations on the company's outlook, this business's fourth quarter revenue could drop to about $6.3 billion, declining more than 20% quarter-over-quarter, far below the previous market expectation of about $8.4 billion.
This change reflects both weakened demand and severe inventory adjustments. Related pressures are expected to continue into the first quarter of 2027, and Intel currently expects global PC market shipments to decline by 10% year-over-year in 2027.
The data center business continues to grow. The company expects DCAI fourth quarter revenue to increase by mid-teens percentage points quarter-over-quarter. Bernstein estimates that its revenue could reach about $8.4 billion, higher than the market expectation of $7.7 billion. However, this increase is still insufficient to offset the decline in the client business.
For Intel, the server business is providing support, but the extent of the adjustment in the PC market determines the direction of overall performance in the short term.
### Gross margin under pressure again, incidents cannot explain all the gaps
Intel expects fourth quarter gross margin to drop to 38%, a decrease of about 6 percentage points from the third quarter, and also below the market expectation of 42.8%.
According to research reports, the nitrogen trifluoride (NF₃) tank incident at the Israeli wafer fab in October and the subsequent production halt are expected to result in about $300 million in revenue loss; related scrap losses are expected to drag down gross margin by about 2 percentage points.
However, even excluding the impact of the incident, fourth quarter revenue is only about $15.8 billion, with a gross margin of about 40%, still below market expectations of $17.03 billion and 42.8%. This indicates that the performance gap also comes from broader operational pressures, and a one-time incident can only explain part of it.
Bernstein had previously anticipated headwinds in the PC market, but this guidance shows that the actual impact is more severe than its judgment and exceeds investor expectations. The strength of the server business helps Intel restore its operational foundation, but in the short term, the market still needs to reassess the impact of declining client revenue and falling margins.
The firm maintains Intel's "Market Perform" rating and a target price of $110, with the valuation based on an average sales forecast of about $78.3 billion for fiscal years 2027 and 2028, giving about an 8 times enterprise value to sales ratio. The core variables to watch going forward are whether the PC inventory adjustment can end on schedule, whether server supply improvements can translate into sustained revenue, and whether process yield improvements can continue to support gross margins.