An awful outlook from chipmaker Intel (INTC) sent shares plunging. In Q4, the company said it earned an adjusted $0.10, half of the analyst consensus estimate, and had revenue of $14.0 billion, $500 million behind the consensus, asserts John Buckingham, editor of The Prudent Speculator.

It’s hard to believe, but the outlook was even more grim. The company expects adjusted revenue between $10.5 billion and $11.5 billion, compared with the analyst consensus estimate of $14 billion.

Intel expects to lose $0.15 per share next quarter, while analysts were expecting a $0.25 gain. The gross margin is also not great, expected by Intel to be 39%, versus the 46% consensus estimate. In research notes, analysts called the results “astonishingly bad”, “stunning” and “extremely weak”.

The reaction for many shareholders seemed to be to sell, even as the stock is still up over 6% in 2023. Our knee-jerk reaction as Value investors was to pile in on the buy side. However, we have not yet made additional purchases.

Our thinking is that Q4 might be a “kitchen sink” quarter, in which management throws in all of the bad news possible, which makes subsequent quarters look excellent. Of course, we think the kitchen-sink argument might work better if Intel didn’t have massive manufacturing complexities that will take years to work out.

The company has spent enormous sums on its manufacturing, yet it continues to lose market share to the likes of Advanced Micro Devices (AMD) and in-house designs. It’s difficult to watch, considering the company once had a virtual lock on all high-powered processors in the world.The downside case is that this is the beginning of the end for Intel and that CEO Pat Gelsinger is simply rearranging the deck chairs on the Titanic.

Our expectations are somewhere in the middle. Intel is not dead – far from it. The company has a good balance sheet ($34 billion of cash and $8 billion of net debt) and does have products that stack up well with competitor offerings.

The challenge is that Intel designs and builds its chips, whereas competitors design them but send them out to other “fabs” to be manufactured. Getting both the design and manufacturing right contributed to INTC’s early success, but the advantage has been reversed lately.

While we think the stock is on sale and is highly discounted from its risk-adjusted fair value (high risk, high upside requirement), there are likely to be many fits and starts before the company gains momentum (and market share). Almost certainly, the stock price will rise in advance of the improvements, so we are reminded that the hardest part of market timing is getting the timing right.

For the moment, we are content with our other IT exposure, so we are OK sitting on our hands as of this writing, although we might find value in bringing INTC up to a full position sooner rather than later. Our Target Price for INTC has been pared to $38.

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