Intel Earnings Expected to Slump on PC Rout, Economic Weakness

Intel and other chip makers cashed in on a boom in computer and electronics sales at the outset of the pandemic with the shift toward remote work and distance learning. The market has turned, though, with high inflation, rising interest rates and recession fears that have weighed on demand.

Tech companies more broadly are facing some of these pressures, driving gloomier-than-expected outlooks this week at companies including

Microsoft Corp.

MSFT -7.72%

, Google parent

Alphabet Inc.

GOOG -9.63%

and Facebook parent Meta Platforms Inc. that have sent their shares sharply lower. The strong dollar also has dented their earnings.

Intel has been one of the worst-hit in the chip industry because of its heavy exposure to the PC market. The company posted a surprise loss in the second quarter on softening computer demand. PC shipments are estimated to have seen a 15% contraction in the third quarter, according to International Data Corp. Analysts expect Intel will report a 21.5% third-quarter fall in sales in the division that includes PC chips, which accounts for about half of its revenue.

The company is also being challenged in the datacenter market. Intel chips predominate in server farms that process data for companies and governments, but it is facing growing competition there from rival Advanced Micro Devices Inc. Intel’s datacenter division is expected to report a revenue fall of 28% to $4.67 billion for the third quarter, according to FactSet.

The weakness in Intel’s core business comes at a time when it is expanding manufacturing and seeking to catch up to rivals in Taiwan and South Korea in the race to build the fastest, most cutting-edge chips. But the ambition doesn’t come cheap. Intel Chief Executive

Pat Gelsinger,

who took the helm last year, has disclosed plans to build plants in Arizona, Ohio and Germany, among other expansions. Those projects could cost hundreds of billions of dollars combined.

“While Intel presses ahead with their long-term strategy, it is now abundantly clear that the path to get there was built on a shaky foundation which is now collapsing as PCs appear likely to revert to pre-COVID levels in the near future,” Bernstein Research analysts said in a note.

Intel is hoping to ease the financial burden of its expansion by tapping incentives in the U.S. and Europe, where governments are trying to attract chip production with financial inducements. Intel also struck a deal with Canada’s

Brookfield Asset Management

in August to share costs of the expansion in Arizona.

The chip company listed a small portion of its self-driving technology unit

Mobileye Global Inc.

on Wednesday, pricing the listing above the top of its targeted range and raising $861 million. Mr. Gelsinger said at The Wall Street Journal’s Tech Live conference Monday that the objective of the IPO wasn’t to raise cash but to better-position Mobileye for growth. Mobileye’s shares rose 38% in their trading debut.

Signs have begun to emerge that the deteriorating economic outlook is causing a long-running shortage of chips to ease. Mr. Gelsinger earlier this year predicted it could last into 2024. 

Chips geared toward markets beyond PCs and smartphones have also started to show signs of flagging demand.

Texas Instruments Inc.

on Tuesday said it saw weakness in its industrial segment, prompting a selloff in its shares. The chip industry more recently has been hit by U.S. curbs on some sales to China. Rules put in place this month require chip companies to get licenses from the Commerce Department before exporting certain chip-making equipment and high-performance artificial intelligence and supercomputing chips to China. Mr. Gelsinger said Monday that American restrictions were inevitable as the geopolitical rivalry between the countries intensifies.

Chip maker

Nvidia Corp.

warned that it could lose up to $400 million of quarterly revenue because of the restrictions, and manufacturing-equipment makers

Lam Research Corp.

,

KLA Corp.

and

Applied Materials Inc.

warned of potential revenue drops that, combined, amount to billions of dollars in the coming year.

Write to Asa Fitch at [email protected]