Intel’s FQ3 result was underwhelming. Revenue was slightly lower than expected in the September quarter, and the outlook was roughly in line for the December quarter. Although revenue was up 10% year over year for the critical Data Center Group, it was entirely driven by a rebound in the enterprise segment. The cloud business fell by another 20%, indicating continued share loss in a growing market.

As the competitive pressure from AMD and ARM ecosystem keeps increasing, Intel’s answer is a massive increase in Capex spending to support its IDM 2.0 strategy. Capex will increase by 50% in 2022 to 25-28 billion dollars. The increasing Capex and depreciation will weigh on profitability in a meaningful way. Intel’s gross margin was comfortably in the 60-65% range not too long ago, but it is now expecting a 51-53% gross margin for the next 2 to 3 years before going up again.

However, the issue is that the company needs to fill the new fabs with its products and sell them, or develop a competitive foundry business for the gross margin to improve. Both options will need Intel to regain the process leadership it had lost to TSMC. The company has put out a roadmap to do that in 2025, but Intel’s poor execution in the last few years makes it hard to have confidence. Moreover, the 10-12% revenue growth target over the next five years appears very aggressive. Over the past 15 years, the company has only achieved double-digit growth in 3 years with minimal competition. We find it very challenging to build a case for Intel to grow revenue above 10% in the future. Pat Gelsinger is making some bold moves, which are needed for Intel to regain its mojo. But there are still more questions than answers, and we don’t see the business trajectory changing anytime soon.