Last week Intel released its Q3 2020 earnings. On $18.3 billion revenue it posted $4.90 EPS and raised its fiscal year revenue and earnings target. Moreover, it signaled that it would complete the $2.4 billion buyback balances when the markets stabilize in the future.
Typically, when a company buys back its shares or announces its intention to do so, it is bullish for the stock price. It means that the company views the price as not reflecting the intrinsic value and thus an opportunity to acquire the shares at the lower price reflected in the market.
However this time the market viewed Intel’s results as disappointing. Intel fell 10% in the aftermath of the earnings released, with investors preoccupied by the fact that the company is losing market share to cheaper competitors.
Intel Q3 2020 Earnings Highlights
The market was especially disappointed by the Data Center Group revenue as it fell by 7%. But the overall earnings were solid, and Intel did raise its forecast for the rest of the fiscal year. The company sits on $15.1 billion free cash flow and it paid dividends to its investors worth of $4.2 billion.
However, most of Intel’s business areas suffered a decline when compared to 2019. The company blames COVID-19 but also emphasizes that it did deliver better than expected results despite the pandemic.
In the Data Centric Group, cloud revenue grew 15% y-o-y. At the same time, the enterprise and government market segment declined significantly, a whopping 47%. Despite the fact that it followed two quarters of more than 30% growth, the decline almost whipped out the previous growth. Internet of Things and the memory business run by Intel (NSG) declined as well in the third quarter, by 33%, respectively 11%.
All in all, while the company beat expectations for the quarter, many investors wonder if these expectations were not set too low?
As always, investing is a game of expectations. Investors focus on a company’s ability to create cash and use discounting techniques to find the present value of these future cash flows. The higher, the better – but sometimes the projections are not accurate.
When a company pays a solid dividend and is engaged in a massive buy back program, it signals that it views the valuation as too low. However, despite these messages, investors sent Intel another 10% lower following the Q3 2020 results. Who is right in the end – the company as it fails to bring back investors’ trust, or the investors that view the Intel’s model threatened?