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Fortune
Fortune
Nicholas Gordon

Intel shares erase almost all their 2023 gains after poor earnings and a chip glut

(Credit: Michael Nagle—Bloomberg via Getty Images)

The cooling of the semiconductor market is happening faster—and proving colder—than companies might have expected, as chip firms across the board face a tougher market due to a combination of excess inventory at retailers and a cooling market for consumer electronics. 

The latest company to feel the chill is Intel, which reported fourth-quarter revenue of $14 billion on Thursday, down 32% year-on-year and below analyst expectations. The U.S. chipmaker also reported a 20% drop in full-year revenue at $63.1 billion, coming in below its Taiwanese rival, Taiwan Semiconductor Manufacturing Corporation (TSMC), for the first time, notes Bloomberg.

Even worse, the company reported a loss of $0.7 billion in the previous quarter, and forecasts continued losses in the current quarter. The company declined to give guidance for the full-year in its earnings report. 

Intel shares plunged 9.7% in after-hours trading, following the release of its earnings report, erasing almost all their gains since the start of the year.

“I don't think I've ever seen anything quite like this before”, said Stacy Rasgon, a senior analyst on semiconductors for Bernstein Research, on CNBC after Intel released its earnings. Intel said it had a gross margin of 39% in the most recent quarter, which Rasgon noted is “getting into commodity semiconductor kind of ranges."

Intel’s disappointing fourth-quarter results follow a string of weak earnings for the U.S. chipmaker, whose CEO Pat Gelsinger, who is trying to recapture ground lost to competitors like TSMC, Advanced Micro Devices (AMD), and Samsung Electronics. Intel is investing billions of dollars in a new foundry in Ohio, and is trying to launch a new contract chip manufacturing business.

“We’re on a multiyear journey,” Gelsinger told analysts on Thursday. The company plans to cut $3 billion in costs by the end of the year, and has started laying off staff

'The largest inventory corrections literally that we've ever seen'

Manufacturers and retailers stockpiled inventory after the semiconductor shortages of 2020 and 2021. As early as last summer, chipmakers warned that chip sales could decline as customers worked through existing inventory rather than purchase new chips. 

"We expect some of the largest inventory corrections literally that we've ever seen in the industry taking place," Gelsinger told analysts on the earnings call, according to Reuters

Consumers are also buying fewer consumer electronics, after a sales boom for computers, smartphones and other devices during the COVID pandemic. PC sales in the fourth quarter fell 28.1% year-on-year, according to the International Data Corporation, a market reaserch firm. But it’s not just computers: The IDC says shipments of smartphones are at their lowest level since 2018.

That means Intel’s problems are replicated throughout the entire industry. Earlier this year, Samsung, the world’s largest producer of memory chips, said its quarterly profit fell to an eight-year-low, citing a “greater-than-expected” decline in demand due to excess customer inventories. 

Quarterly revenue at U.S. chipmaker Micron Technologies also fell 47% year-on-year. The company said it would target a 10% reduction in headcount in 2023 to cut costs in its most recent earnings report, released in late December.

On Tuesday, Texas Instruments reported its first decline in sales since 2020.

Companies elsewhere in the supply chain are also feeling the strain. On Wednesday, Lam Research, one of the largest makers of chipmaking equipment in the U.S., said it would cut 7% of its workforce, and CEO Tim Archer told analysts that he expected the market to shrink by over 20% in the coming year. 

Even TSMC, which reported record profits in the fourth quarter, is warning of a slowdown. The Taiwanese chipmaker said it would cut its capital expenses in the coming year due to a likely decline in demand.

"We forecast the semiconductor cycle to bottom sometime in first half,” said TSMC CEO C.C. Wei, with the company forecasting slight sales growth for the year as a whole.

Companies may also be worried about geopolitical risk. Last year, the U.S. imposed export controls on companies selling advanced chips and chipmaking equipment to Chinese companies.

On Thursday, Bloomberg reported that the Netherlands and Japan, two major sources of advanced chipmaking equipment, are likely to join the U.S.’s chip export controls. That could spark blowback from China: a member of Japan’s ruling Liberal Democratic Party warned on Thursday that Japanese companies in China “will probably be damaged” by potential retaliation from Beijing. 

More news on the trajectory of the chip sector will come next week. AMD reports its earnings on Tuesday, followed by Korean chipmaker SK Hynix on Wednesday.

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