Summary of Key Points
Intel's second-quarter financial report appears contradictory: revenue reached $16.1 billion (a 25% year-on-year increase, the fastest growth in 2015), yet it incurred a net loss of $11 billion, while its stock price rose by 12%. The truth is that the loss was due to an accounting revaluation of government-related stock liabilities (not related to its core business), which actually resulted in a profit of $2.2 billion. Growth came from increased prices for server CPUs (due to industry shortages), but sales volumes did not increase, and Intel lost market share to AMD and Nvidia. The PC business was pressured by rising memory costs. The industry shortage is likely to continue until 2027-2028, and Intel is investing heavily in capacity expansion as a bet on the future.
1. Revenue Hits a Record High, but Why a Loss of $11 Billion?
The $11 billion loss has nothing to do with the core business; it's merely a bookkeeping figure resulting from accounting adjustments.
Last year, the U.S. government acquired a 10% stake in Intel, part of which was placed in a trust account—meaning Intel "owes the government shares" that must be gradually released upon meeting the CHIPS Act requirements. According to the rules, this liability needs to be revalued based on stock prices. The higher the stock price, the more valuable the owed shares, and thus the larger the book loss. This item alone accounted for a loss of $12.5 billion (more than the total loss), yet Intel still had a positive cash flow of $7 billion.
In simple terms, the loss is a "book figure" and not actual money; it actually indicates that Intel's stock price has performed well this year.
2. Why Did the Stock Price Rise by 12%?
Investors are not naive; they focus on "real profitability":
- Excluding non-core business losses, Intel's net profit was $2.2 billion ($0.42 per share), doubling market expectations of $0.21 and far exceeding its own forecast three months ago ($0.20).
- Revenue exceeded the forecast by $1.8 billion for the seventh consecutive quarter.
- The third-quarter forecast is also better than what the market expected.
Therefore, the 12% post-market increase reflects the market's recognition of Intel's outperforming core business.
3. Growth Comes from Price Hikes, Not Increased Sales?
The 25% revenue growth was largely due to price increases, with little increase in sales volume:
- Server business revenue grew by 59%, but profits soared by 291% (profits outpaced revenue by five times). This is similar to a restaurant where the number of customers remains the same, but the cost of ingredients doesn't increase; if the price of a bowl of noodles rises from $30 to $50, the extra profit is pure profit.
- Intel's CFO admitted that the higher gross margin was due to "product mix and pricing strategies." Intel hasn't dared to do this in the past 10 years, but now it can because of an industry-wide shortage—advanced chips, memory, and substrates are in high demand, with customers competing for orders, giving Intel more bargaining power.
However, this came at the cost of losing market share: server CPU shipments remained flat year-on-year, with AMD (market share increased from 27.2% to 33.2%) and Nvidia's Grace CPUs (sold in AI rack packages) taking market share.
4. How Long Will the Shortage Continue?
The shortage is likely to persist until new factories start production in 2027-2028:
This shortage is not due to a sudden surge in demand but rather a lack of capacity:
- 90% of global memory production capacity is held by Samsung, SK Hynix, and Micron, which have shifted much of their production to HBM memory for AI applications (which commands higher prices). HBM accounts for three times the capacity of regular DDR5 memory, leading to a sharp reduction in regular memory supply.
- New memory factories are not expected to start production until Micron in Q3 2028, SK Hynix in Q2 2027, and Samsung by the end of 2026. Thus, the shortage will continue at least until 2027-2028.
However, the rate of price increases is slowing down: memory prices rose by 60% in the second quarter and are expected to rise by 13-18% in the third quarter as consumer demand fades.
5. Intel's Future Bet: Can Price Hikes Lead to Success?
Intel is investing all the money from price hikes in capacity expansion:
- Capital expenditure has been increased from $18 billion to over $20 billion, with more planned for 2027, mainly for building a 14A process factory (expected to start production in 2028).
The challenge is that Intel has very few external customers in its foundry business (only Fortinet as a public customer this quarter).
The test will come when new capacity becomes available in 2027-2028: if the memory shortage eases, Intel's pricing power may decrease. It will need to rely on market share to remain competitive. If it can attract more external customers for its foundry business, the price hikes will be worthwhile; otherwise, the investment could prove futile.
In Conclusion
Intel is currently reaping benefits from price hikes, but this is only a "short-term windfall." Whether it can maintain its market position in the long term depends on whether the new capacity will help it compete effectively after the shortage ends. Price hikes have helped in the short term, but true success will depend on its ability to sustain its competitiveness through expanded production.