Intel: Barclays And Goldman Downgrades Reveal How Wall Street Really Works

From the transcript of Intel’s Q2 earnings call, you would not think there was anything to worry about. Intel had a great quarter and most analysts on the call just wanted guidance as to how to adjust their spreadsheets. However, a little more than a week later, Barclays and Goldman Sachs both downgraded Intel. Investors may wonder if there was another call where the hard questions about Intel got asked and answered?

Last week, Barclays and Goldman both downgraded Intel. (Photo by Justin Sullivan/Getty Images)

The short answer is the hard questions never get directly addressed during these calls. The reason is simple. The analysts work for banks that want a shot at Intel’s investment banking business. If you embarrass the CEO by asking tough questions, your firm is not going to get the investment banking business.

In March 2017, Citibank and Rothschild split between $10 to $20 million in fees when Intel bought Mobileye for $15.3 billion. Rothschild did not have an analyst on the July 26 call, but Citigroup did. Here’s what he asked.

Christopher Brett Danely – Citigroup Global Markets, Inc.

Thanks, guys, just a quick one on the DCG (Data Center Group) op margins. So data center rev was up sequentially, but the op margins were down. I think you talked about the 10-nanometer yield issues. Was that all that was going on there? And so essentially, are DCG operating margins capped at this 49% and change level? And when are these 10-nanometer headwinds going to go away and reverse and start to become tailwinds?

Robert Holmes Swan – Intel Corp.

So just to maybe repeat, 27% top line growth and 65% operating income growth with an 11 point improvement in operating margins year on year. So outstanding performance on product margin, as Navin indicated, particularly with strong ASP performance. Our margins have continued to improve, and I’d just say not at the expense of curtailing investments for our data center business. We see real good growth opportunities and we continue to invest, so really good expansion in margin performance while continuing to invest.

In terms of 10-nanometer, that is more – again, with client being first on 10-nanometer, they are more feeling the effect of the 10-nanometer on their margins. That’s relatively de minimis effect for the DCG business.

Christopher Brett Danely – Citigroup Global Markets, Inc.

Okay. Thanks, Bob.

He was on the right track but stopped short asking some really tough questions such as;  What happens when AMD launches its 7 nm products next year? Will Intel have competitive products at that time?

The closest we get to that question came from Blayne Curtis from Barclays.

Blayne Curtis – Barclays Capital, Inc.

Hey, thanks for taking my question. I just want to ask you about 7-nanometer. You mentioned 10-nanometer and timing there, and I don’t expect you to put a date out there for 7-nanometer. So maybe you could talk about what you’ve learned on 10-nanometer, how you’re applying it to 7-nanometer, and any indications of that development, how it’s going.

Venkata S. M. Renduchintala – Intel Corp.

Sure. Blayne, so 7-nanometer is very much R&D in deep progress, and we’re making good progress on that development. We’re not giving a direct timeline right now. But we’ve also made some fairly judicious choices in defining 7-nanometer, learning from our 10-nanometer experiences. And we’re focusing on an optimum balance point between density, power and performance, and schedule predictability. So I think what you’ll see is a more balanced approach across those three vectors.

So we’re still going to drive density but balancing that with a continued focus on driving transistor performance at the same time, which is highly valued as ASP drivers both in our client and server businesses. And we’re really also focusing on being much more precise in our ability to launch. So those are the key learnings that are coming out of 10-nanometer as we go into 7-nanometer. And as we monitor progress on 7-nanometer just as closely as we are on 10-nanometer, I feel those lessons are being well absorbed into our progress, and we’re lining up to support our product plans as our roadmap dictates.

Blayne Curtis – Barclays Capital, Inc.


He got closer to asking the key questions. But then he lets Intel get away with a vague answer that does not address his question.

Immediately after the conference call, Intel traded down over 8% in the after-hours market. From that we can infer that Blayne Curtis was not the only analyst who didn’t like what he heard.

In fairness to the analysts, it is important for them to give their insights to their best clients first. If they don’t like what they hear, they will tell their best customers before tipping off other analysts that they’ve turned against Intel.

Bank of America waited one day to downgrade Intel to Neutral from Buy.

Then, on August 6, Barclays downgraded Intel from Overweight to Equal Weight. Blayne Curtis said in a note to clients.

Intel continues to believe that it can retain a performance advantage even with a process node disadvantage, but has provided little evidence to support this, creating an overhang well into 2019.

Joining the chorus, on August 10, Goldman Sachs analyst Toshiya Hari cut his rating from neutral to sell citing greater competitive risk and skepticism over its ability to sustain margins and earnings growth. He must have felt confident because he was not even on the July 26 call to ask any questions.

Investment Banking Fees At Risk

Scaling up a 10 nm production line, and then a 7 nm one shortly thereafter is going to require billions in financing. By downgrading Intel, Barclays and Goldman have effectively taken themselves out of the running to raise this financing.

Among the analysts on the July 26 call, Barclays and Bank of America have downgraged Intel. The other analysts on the call who have maintained their ratings are:

  • Christopher Brett Danely – Citigroup Global Markets, Inc.
  • Pierre C. Ferragu – New Street Research LLP (US)
  • John William Pitzer – Credit Suisse Securities (NYSE:USA) LLC
  • Stacy Aaron Rasgon – Bernstein Research
  • Ross C. Seymore – Deutsche Bank Securities, Inc.
  • Timothy Arcuri – UBS Securities LLC
  • Joseph Moore – Morgan Stanley & Co. LLC
  • Ambrish Srivastava – BMO Capital Markets (United States)
  • Christopher Rolland – Susquehanna Financial Group LLLP
  • C.J. Muse – Evercore ISI
  • Kevin Edward Cassidy – Stifel, Nicolaus & Co., Inc.
  • Tristan Gerra – Robert W. Baird & Co., Inc. (Broker)

If you rely on any of these firms for guidance on Intel, it is time to ask them the hard question they did not ask Intel’s CEO. How competitive will Intel be after AMD launches its 7 nm products?

I think I know the answer and I don’t need to wait to hear it from a Wall Street analyst. It’s only a matter of time before the firms that lose out on the investment banking engagement will find the courage to lower their ratings on Intel.

Tony Mitchell has consistently judged the news about Intel and AMD better than everyone else. If you would like to know when he updates his views, click here.

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