Intel's Earnings Beat Can't Stop Data Center Slide

The road to redemption is still a long one after semiconductor stock Intel (INTC) reported fourth-quarter earnings. 

Although it beat Wall Street expectations on the top and bottom lines as well as exceeding its own gross margin forecasts, key data center and foundry operations are faltering creating doubt about the chipmaker's ability to compete in the DeepSeek new world order.

By The Numbers

Even though Intel sales and profits exceed analyst forecasts, it was only because the bar had been set so low.

Dwindling AI Impact

Co-CEO Michelle Johnston Holthaus told analysts during Intel's earnings conference call that the chipmaker was "committed to...rebuilding our credibility through persistent hard work that delivers tangible results."

So far, the credibility gap remains wide.

Intel had hoped its data center strategy would drive its business forward, but it keeps falling behind. Advanced Micro Devices (AMD) surpassed Intel in data center revenue for the first time last year, and sales keep dropping.

In Q4 INTC reported data center and AI revenue dropped 3% to $3.39 billion. In AMD's third quarter report last year, it said it generated $3.5 billion in sales, a 122% increase over the prior year's effort. So when it reports full-year results next week, AMD will likely be way in the lead over its rival.

Worse, operating profits for the business plummeted 68% to just $233 million. Advanced Micro Devices had over $1 billion in segment operating income.

A Crumbling Foundation

Things aren't much better on Intel's foundry front either as revenue tumbled 13% during the period to $4.5 billion. 

The semiconductor stock faces numerous challenges, including low yield rates and a lack of outside customers.

A report last month said its 18A process, which was supposed to be a "turning point" for Intel Foundry, is only achieving 10% yield rates, which industry site wccftech says makes "it impossible for the semiconductor to reach mass-production stages."

Intel separated the foundry operations last year into a standalone subsidiary in a bid to raise outside funding. Having spent $25 billion on its operations in each of the last two years, it has served as an anchor on INTC's bottom line. It doesn't seem to be improving.

Who's Running The Show?

Total revenue at Intel dropped 7% year-over-year, so despite beating its own guidance and that of Wall Street, the chipmaker is still in decline. 

The only segment that improved was network and edge, which saw sales rise 10% to $1.6 billion. Other than its catch-all other segment at $1 billion in sales, network and edge is Intel's smallest.

Yet some analysts didn't even care about what numbers the chipmaker posted. Bernstein analyst Stacy Rasgon wrote in a note to investors ahead of the report, "It would seem to us that the plans of the (unknown) future CEO and the Board of Directors would matter much more than whether PCs or servers beat or miss (estimates)."

Former CEO Pat Gelsinger announced his immediate retirement in December and Intel has been operating on an interim basis with co-CEOs until the job can be filled.

Key Takeaway

Chinese AI lab DeepSeek upended the artificial intelligence market with a sleek, efficient, and cheap to operate and run open-source AI model that beat all existing models. It also used underpowered A800 chips from Nvidia (NVDA).

While running large language models on suboptimal AI accelerators could theoretically benefit Intel's AI dreams, with plenty of better options available to data centers and hyperscalers, Intel looks like it will remain an also-ran in the space, one with dwindling impact on the industry's direction.

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