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Intel ‘needs to catch up’ after disappointing quarter: analyst

Intel disappointed in its latest quarter, with data center sales falling short. Yahoo Finance’s Alexis Christoforous and Brian Sozzi speak with Santosh Rao of Manhattan Venture Partners about what it means for the chip sector.

Video Transcript

- Investors not too happy with Intel this morning. That stock is down about 10% right now. The chip giant met expectations, but sales in its data center division fell below forecasts. It seems that fewer big companies and government clients are buying up those big servers after stocking up earlier this year.

Let's bring in Santosh Rao, head of research at Manhattan Venture Partners. Santosh, good morning to you. So I'm going to put to you the same question I put to a couple of folks this morning. Are Intel's-- is Intel's report indicative of issues with Intel, or does it speak to a broader issue for the chip sector?

SANTOSH RAO: Yeah. I think it's both. Intel has its issues. It has its issue with the manufacturing. It has some mixed issues as well. It dominates the old enterprise server, PC market. But the market is moving away more and more towards cloud and the other consumer markets.

In fact, we saw that in the first half. And that's what happened. Demand got pulled forward in the first half from the second half. And this mix shifted also from its highly-profitable to the less-profitable side of the business.

So I think going forward, it's all about execution. Intel needs to get its manufacturing in order. And it needs to start executing it has AMD and Nvidia chipping away at its heels. So it has competition. The market is changing.

They need to catch up. They need to move fast, and they need to compete aggressively. So it's a broader issue, as well as a Intel-specific issue.

JARED BLIKRE: Jared Blikre here. I got to ask you about their plans for the 7 nanometer space here. They're trying to compete with AMD of course. But they announced yesterday that they might have to outsource that. How big of that is a concern for the company?

SANTOSH RAO: In fact, I would say I think outsourcing might be much better. It might be moot. They've been slow in doing what-- they're doing it in-house. So outsourcing might be the right solution. And they are going to announce that.

We didn't hear it this quarter. Hopefully, we'll hear more about it when it'll happen. So they need to do that to, really keep pace and keep the whole momentum going at this point. So I think that's delaying the process. The in-house manufacturing, I think are going out to Taiwan Semiconductor or Samsung out-- companies will speed up the whole process of manufacturing.

- Santosh, I think many on the street could agree that Intel is way behind the curve on getting its next generation of chips out, not just a little, way behind. So that begs the question, does Intel stock deserve to be cut in half?

SANTOSH RAO: Yes. It definitely needs to be it needs a haircut at this point because, you know, the market is moving towards AI and internet of things and other areas, and Intel leads to catch up. I mean, they're in there, but they're not. Nvidia and all the other and AMD is very strong.

So they need to move fast. So they-- definitely a haircut is warranted. How much? We'll wait and see. In the end, it's an incumbent. It has resources.

It can fight back. It can reinvent itself, which it has done in the past. But at this point, they are lagging behind. And they deserve, not a cut into half, but a modest discount is warranted.

- How much does Apple, now making its own chips, hurt Intel? Because Apple was a huge client for Intel in that space.

SANTOSH RAO: Yes. It's a big thing. I mean, it definitely affects them. When Apple is not on your side, it definitely affects your whole setup. So but we'll see. I mean, they're working around it.

They will continue to-- like I said, they have the resources to kind of to reinvent themselves and find other sources, but I mean, increase the-- keep the demand picture strong. But we'll see how it does. But definitely, Apple not in the picture does affect them.

- Even there are struggles. And yes, I would agree. The balance sheet Intel is OK. But they're going to have a very tough road over the next three to five years. Do you think it makes sense for them to spin back out [? Mobili? ?]

SANTOSH RAO: Yeah. I think we'll see. I mean, they're doing that with [? Anan ?] now and maybe the other one also. They have to do something about it. I mean, the competition is not what it was in the past. They've dominated the space.

So they will have to get leaner and more focused and more effective at this point. So it makes sense. If it comes to that, they will spin that out as well. Right now, it's a very small part of their total revenue base.

But I think at some point, they might consider that as well. But they need to really go back to the table and really come up with a better strategy to compete with strong competitors at this point, especially in media and AMD.

- All right, Santosh Rayer-- Manhattan-- Rao-- Manhattan Venture Partners. Thanks for being with us.

SANTOSH RAO: Thank you.