Intel's Data Center Boom Can't Offset PC Slump

Intel reported third-quarter revenue of $16.5 billion, up 21% year-over-year, driven by a 78% surge in data center and AI revenue to $7.3 billion—the strongest growth in 15 years. GAAP gross margin improved to 43% from 38.2%, and data center operating income roughly tripled to $3.0 billion. However, the company's fourth-quarter guidance came in well below expectations, forecasting revenue of $15.0–16.0 billion, down from Q3, and GAAP gross margin of just 37.1%. Management also warned of a PC market slowdown expected to persist through the first half of next year.

The market reacted sharply, with shares plunging about 18% in after-hours trading. The disconnect between record data center demand and the gloomy forecast highlights Intel's challenge: its server chip business is booming, but the PC segment is dragging down overall performance. Management noted that demand for Xeon server chips is outpacing supply, and their top priority is to increase supply to meet that demand.

The earnings per share fell to $0.60 from $0.90 a year ago, despite higher operating income. This decline was partly due to a $5.45 billion gain from selling an Altera stake in the prior-year quarter, and a significant increase in share count following a $23 billion public offering this quarter, which diluted per-share profits.

Investors are now focused on whether Intel can maintain its data center momentum while navigating the PC downturn. The company's ability to ramp up Xeon supply will be critical in the coming quarters, as will any signs of stabilization in the PC market.

The stark contrast between Intel's data center strength and its weak overall guidance underscores the company's vulnerability to the cyclical PC market. While data center now accounts for a growing share of revenue, PCs still represent a substantial portion of Intel's business, and the expected slowdown through the first half of next year will weigh on results. The guidance for gross margin to drop to 37.1% from 43% is particularly concerning, as it suggests that the fixed costs of chipmaking are spreading over lower volumes, eroding profitability.

Moreover, the lack of explanation for the margin decline in the release leaves investors guessing. It could be due to lower PC volumes, pricing pressure, or increased costs related to ramping new process nodes. Without clarity, the market assumes the worst, hence the sharp sell-off. The dilution from the $23 billion stock offering also means that even if profits recover, they will be spread across more shares, limiting upside for existing shareholders.

Looking ahead, Intel's ability to execute on increasing Xeon supply will be key to sustaining data center growth. However, the PC slowdown may prove more severe than expected, and competition from AMD in both data center and PCs remains intense. The company's foundry ambitions also require heavy investment, which could pressure margins further. For now, the stock is likely to remain under pressure until there are signs of a turnaround in the PC market or a clear path to margin recovery.