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Intel's Data Center Business Struggles

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Considering how strong the major cloud computing companies are growing, it’s a little surprising how bad that growth is. intelof (INTC -8.56%) Second quarter data center business results.

Intel’s enterprise customer base is much wider than any cloud computing provider, and recession concerns are beginning to influence corporate buying and expansion decisions. However, the company wasn’t even within expectations.

an unexpected weakness

Intel’s data center and artificial intelligence (AI) segment posted revenue of $4.65 billion in the second quarter, down 16% year over year. Analyst Vivek Arya bank of america (back 1.47%) Merrill Lynch noted in its earnings call that this performance was nearly 25% below expectations.

There were multiple factors that knocked out Intel’s profitable data center business. First, similar to what’s happening in the PC market, Intel’s data center customers are adjusting their inventory levels to better reflect current market conditions. Companies that sell servers are unwilling to hold large inventories of components in the face of uncertain demand, and customers using Intel’s data center chips in their own data centers are facing economic downturns. As we weaken, we may be adjusting our upgrade and expansion plans.

Second, Intel struggles to get necessary components such as Ethernet and power components. Constraints in his supply chain are still holding back the semiconductor industry, but lower demand could go a long way toward solving that problem.

Finally, Intel has acknowledged that there are performance issues with CPUs in the Sapphire Rapids data center. According to CEO Pat Gelsinger, the company aims to maintain “high quality standards”, so additional steps have been taken in the product line that are essentially design changes. will increase late this year and into next year, pushing back some earnings.

For the full year, Intel lowered its expectations for the overall server-related addressable market, reflecting slower growth. The company also expects it to grow more slowly than the overall data center market as it restructures its product portfolio.Intel is a market leader, but faces pressure from competitors’ competing offerings Advanced Micro Devices (AMD 3.05%).

Why turnarounds matter

Intel’s data center business was profitable, or at least it was. For example, in 2020, the Data Center segment generated $10.6 billion in operating profit for him against $26.1 billion in revenue. The operating margin is about 40%.

Operating profit plummeted in the second quarter due to the headwinds Intel is facing in its data center business. Operating income in this segment fell to just $214 million from $2.1 billion in the same period last year. This 90% decline is due to a number of factors, including the cost of launching advanced manufacturing nodes, investment in product roadmaps, and costs associated with prototyping Sapphire Rapids CPUs.

While Intel is optimistic that Sapphire Rapids will be a successful product line, Gelsinger admitted on the earnings call that the company’s run wasn’t the “best time” of running, and that “we’re re-running machines.” We are building,” he added.

Intel expects its data center market opportunity to grow at least at a rate in the mid-teens per year over the long term. Sapphire Rapids, as well as ancillary products such as the Arctic Sound-M data center GPU, can help capitalize on that growth if it grows well.

Bank of America is an advertising partner of The Ascent by The Motley Fool. Timothy Green works for Bank of America and Intel. The Motley Fool US headquarters recommends Advanced He Micro Devices and Intel. The Motley Fool recommends the following options: Intel’s Jan 2023 long call at $57.50 and Intel’s Jan 2023 short put at $57.50. The Motley Fool’s U.S. headquarters has a disclosure policy.