Intel (Nasdaq: INTC) The company reported a net loss of $1.6 billion for the second quarter, a negative change of more than $3 billion from the same period last year. The company’s adjusted gross margin was 38.7%, down from the same period last year and far from its long-term target of 60%.
There are many reasons for Intel’s plummeting revenue, but a big one is the company’s aggressive efforts to lead the artificial intelligence (AI) PC market.
Accelerating Meteor Lake
Intel launched its Meteor Lake laptop chips late last year, its first PC central processing units (CPUs) with a dedicated AI processor, but the AI power it offers is far less than newer chips from AMD and Qualcomm.
Still, Meteor Lake marks the beginning of Intel’s efforts to establish dominance in the AI PC market, which the company expects to account for more than 50% of the market by 2026 as consumers upgrade to take advantage of advanced AI capabilities.
Intel has shipped over 15 million Meteor Lake chips to date, but it’s come at a significant cost. Intel has accelerated Meteor Lake production to meet demand, choosing to move wafer production from Oregon to Ireland, where wafer costs are currently higher. The Irish fab will eventually become more efficient as production scales up, but it’s still early days.
According to analyst Patrick Moorhead, Intel is running a “hot lot” of Meteor Lake, which essentially means Intel is prioritizing the Meteor Lake batch to produce it more quickly by slowing down everything else, making the foundry less efficient overall.
Meteor Lake is Intel’s first tile-based PC chip, and the first to be manufactured partially on the Intel 4 process. It’s unclear if Intel is having yield issues with Intel 4, but for the time being, the uptake of Meteor Lake is a big hit to revenue.
Luna Lake Outsourcing
As the Irish factory expands, Meteor Lake’s profitability will improve, but that improvement will be offset by Lunar Lake, which offers significant improvements over Meteor Lake in terms of AI processing power, graphics performance and battery life and is scheduled to be officially launched in September, but Intel has chosen to almost entirely outsource manufacturing to Taiwan Semiconductor Manufacturing Company.
The downside to outsourcing is rising costs. Intel CFO David Zinsner noted that the company will see rising costs, which will hurt gross margins as Lunar Lake shipments ramp up next year. Also, Lunar Lake builds the memory directly into the package to maximize efficiency, which will further reduce margins. “So you’re basically buying it at a price and then having to build it into the price with a 0% margin. So that puts some negative pressure on margins,” Zinsner said on the earnings call.
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Lunar Lake should improve Intel’s position in the AI PC market — 80 Copilot+-branded PCs are already available from 20 OEMs and are expected to start shipping in the third quarter before the holidays — but the new chips will be a drag on profitability.
Expectations for Panther Lake
Intel’s gross margin issues in its PC business should be largely resolved by Lunar Lake’s successor, Panther Lake, scheduled for launch in 2025. Panther Lake will use Intel’s upcoming 18A process. By bringing manufacturing back in-house, Intel expects Panther Lake’s cost structure to be much better than Lunar Lake’s.
Panther Lake will launch in 2025, but production will ramp up alongside Intel’s 18A process in 2026. “You know, 2026 should be a good year for us in terms of gross margins,” Zinsner said during the earnings call.
Intel is doing its best to compete with both AMD and Qualcomm in the AI PC market. Costs are rising to get Meteor Lake chips to market faster, and outsourcing Lunar Lake will reduce gross margins until 2025. However, that should start to change from 2026 onwards, when Intel’s manufacturing investments start to pay off.
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Timothy Green owns shares of Intel. The Motley Fool owns shares of and recommends Advanced Micro Devices, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends buying Intel’s January 2025 $45 calls and selling Intel’s August 2024 $35 calls. The Motley Fool has a disclosure policy.
The article Intel’s AI PCs are eating into profits was originally published by The Motley Fool.
