Bernstein Interpretation: Intel Falls About 20% After Hours, Server Growth Struggles to Offset PC Business Decline

TL;DR

Third-quarter revenue was $16.513 billion, broadly in line with expectations; adjusted earnings per share were $0.52, above the market expectation of $0.40.

Data Center and AI revenue was $7.318 billion, beating expectations, but Client revenue was only $8.097 billion, significantly below expectations.

Fourth-quarter revenue guidance is $15.5 billion, about 9% below market expectations; earnings per share guidance is $0.25, about 42% below expectations.

Client segment fourth-quarter revenue is expected to decline more than 20% quarter-over-quarter, with weak demand and inventory adjustments expected to persist through the first quarter of 2027.

Fourth-quarter gross margin is expected to fall to 38%; even excluding the roughly 2 percentage point impact from the fab incident, it remains below market expectations.

Bernstein maintains a "Market Perform" rating and a $110 price target, believing that PC business headwinds may continue to weigh on the stock price.

Intel's third-quarter earnings improvement failed to ease market concerns about the next quarter.

According to Bernstein's initial earnings review, Intel reported third-quarter 2026 revenue of $16.513 billion, broadly in line with market expectations; adjusted earnings per share were $0.52, above the expected $0.40. However, the company's fourth-quarter guidance weakened markedly, with revenue, gross margin, and earnings per share all significantly below market expectations. As of the time of writing, Intel shares were down about 20% after hours.

The earnings pressure came mainly from the PC business. Memory shortages already affected third-quarter Client revenue, and the combination of weakening demand and inventory adjustments in the fourth quarter means that growth in the server business is still insufficient to support overall company performance.

Third-quarter earnings beat expectations, business divergence already evident

Intel's third-quarter Client Computing Group (CCG) revenue was $8.097 billion, below the market expectation of $8.819 billion, a shortfall of about $722 million. Meanwhile, Data Center and AI (DCAI) revenue reached $7.318 billion, above the market expectation of $6.675 billion, largely offsetting the Client business revenue shortfall.

Server demand remains strong and supply has improved somewhat, but Intel said demand is still far outpacing supply.

The profit side showed a more positive performance. Third-quarter gross margin reached 44.1%, above the market expectation of 42%, mainly driven by yield improvements in the Intel 3 and 18A process nodes, as well as product mix improvement. Operating expenses were also lower than expected, driving operating income to $3.234 billion, above the market expectation of $2.697 billion.

In addition, the actual tax rate of 11% was below the market expectation of 19.4%, further supporting earnings per share. Therefore, this earnings beat included contributions from manufacturing and product mix improvements, expense control, and a lower tax rate, and cannot be entirely attributed to end-demand growth.

PC inventory adjustment intensifies, fourth-quarter revenue expected to decline sequentially

Intel expects fourth-quarter revenue of $15.5 billion, below the market expectation of $17.03 billion, down about 6% from the third quarter; adjusted earnings per share are expected to be $0.25, significantly below the market expectation of $0.43.

The client business is the main drag. According to Bernstein's estimates based on the company's outlook, revenue for this business could fall to about $6.3 billion in the fourth quarter, down more than 20% sequentially, far below the market's previous expectation of about $8.4 billion.

This change reflects both weakening demand and severe inventory adjustment. Related pressure is expected to persist into the first quarter of 2027, and Intel currently also expects global PC market shipments to decline 10% year over year in 2027.

The data center business, meanwhile, continues to grow. The company expects DCAI fourth-quarter revenue to grow sequentially at a mid-teens percentage rate. Bernstein estimates on this basis that revenue could reach about $8.4 billion, above the market expectation of $7.7 billion. But this increase is still not enough to fill the decline in the client business.

For Intel, the server business is providing support, but the magnitude of the PC market adjustment determines the direction of overall short-term performance.

Gross margin under pressure again, incident cannot explain the entire shortfall

Intel expects fourth-quarter gross margin to fall to 38%, down about 6 percentage points from the third quarter and below the market expectation of 42.8%.

According to the research report, the nitrogen trifluoride (NF₃) tank incident at the Israeli fab in October and the subsequent production halt are expected to cause about $300 million in revenue loss; related scrapping losses are expected to drag down gross margin by about 2 percentage points.

But even excluding the impact of the incident, fourth-quarter revenue would be only about $15.8 billion, with gross margin at about 40%, still below the market expectations of $17.03 billion and 42.8%, respectively. This means the performance shortfall also stems from broader operating pressure, and the one-time incident can explain only part of it.

Bernstein had previously anticipated headwinds in the PC market, but the latest guidance indicates the actual impact is more severe than its assessment and exceeds investor expectations. Strength in the server business helps Intel restore its operating foundation, but in the near term, the market still needs to reassess the impact of declining client revenue and margin pullback.

The firm maintains its "Market Perform" rating on Intel and a $110 price target, with valuation based on average sales forecasts of approximately $78.3 billion for fiscal years 2027 and 2028, applying an enterprise value-to-sales multiple of about 8x. The core variables to watch going forward are whether the PC inventory correction can end on schedule, whether improved server supply can translate into sustained revenue, and whether process yield improvements can continue to support gross margins.

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