Semiconductor giant Intel Corp. saw its stock dive in after-hours trading today after its third-quarter sales fell short of Wall Street’s targets.

The company blamed component shortages that hampered its all-important personal computer business. Intel also warned investors its gross margin and free cash flow is likely to decline to a lower level over the next two to three years on account of the billions of dollars it plans to invest in new chip factories and research and development.

For the third quarter, Intel reported a profit before certain costs such as stock compensation of $1.71 per share on revenue of $18.1 billion, up 5% from the same period a year ago. Wall Street was expecting a lower profit of just $1.11 on higher sales of $18.24 billion, so the results were a bit of a mixed bag.

What hurt Intel this quarter was the performance of its largest Client Computing business, which makes chips for PCs. Revenue fell 2% year-over-year, to $9.7 billion, as a result of lower laptop volumes. Intel said the lower volumes were a direct consequence of component shortages elsewhere. Some of its customers were struggling to obtain the parts they need to finish assembling computers, it said, hence the lower volume.

Intel Chief Executive Pat Gelsinger (pictured) told CNBC in an interview that the lower PC volumes were partially offset by higher average selling prices and strength in desktop sales. He insisted PC demand is still strong, and said he believes it will remain that way for some time to come.

“We do think the PC business is now just structurally larger, a million units-a-day kind of business,” he said.

A much better performance came from Intel’s Data Center Group, which sells processors for data center servers and similar hardware. The unit delivered sales of $6.5 billion, up 10% from the same period last year, though slightly below analysts’ estimate of $6.6 billion. Intel said it was seeing greater demand for on-premises servers from both corporate and government customers.

The company also saw growth in its smaller Internet of Things and Mobileye automotive businesses, with revenue up 54%, to $1 billion, and 39%, to $326 million, respectively.

Analyst Holger Mueller of Constellation Research Inc. said that although the results were mixed, Intel did at least demonstrate growth overall. “The gains in the data center and IoT are very positive,” he said.

Still, Mueller noted that there’s a lot of uncertainty around where Intel’s PC business is headed. “People are waiting to see if this is a post-pandemic catch-up correction or if Intel has set itself on a new growth trajectory with the PC business,” he said. “Only future quarters will tell for sure.”

Regarding its future plans, Gelsinger told analysts on a call the company is entering a period of massive capital expenditure, with plans to invest $20 billion this year alone. Those investments include a new semiconductor factory in Arizona. Besides foundries, the company is also spending money on networking, graphics and autonomous vehicle chip research, Gelsinger said.

“These four new growth businesses… have massive growth potential for us,” Gelsinger said, adding that Intel is targeting a long-term compound annual growth rate of 10% to 12%.

Gelsinger has previously discussed how Intel plans to shift its business model to become a contract manufacturer, using its foundries to make chips for other companies besides its own silicon. It will continue to design and manufacture its own chips.

Intel believes semiconductor industry sales will double in the next 10 years, so the move into contract manufacturing is likely to be extremely lucrative for the company, if that forecast holds true. But getting there requires massive investment first of all, and investors are keeping a careful eye on the company’s gross margin, which is revenue left over after accounting for the cost of goods sold.

In the analyst call, Gelsinger said the firm’s gross margin will decline, but he promised it would not fall below 50%, and that it will recover in time. For the quarter just gone, Intel reported a gross margin of 56%, up 2.9% from a year ago.

Unfortunately for Intel, Gelsinger’s reassurances were apparently not enough to assuage investor’s fears, with a sharp selloff sending its stock down 8% in extended trading.

Charles King of Pund-IT Inc. told SiliconANGLE that he believes Intel’s investors are in an uncomfortable position. There was a general consensus when Gelsinger took over the company that he would be able to get it back on track after a half-decade of “meandering and often failed market strategies,” he said.

“The thing is, changing course in a vessel of Intel’s size is neither easy nor immediate,” King warned. “During the call, Gelsinger truthfully noted the decision to invest in R&D and new fabs, which is vital to Intel’s long-term health and success, would depress margins by a few points. Perhaps if he’d dissembled a bit, skittish investors would have been pacified enough not to jump ship in after-hours trading, but that’s not Gelsinger’s way and it’s not in anyone’s best interest.”

In any case, King expressed optimism about Intel’s long-term future, saying the company remains in solid shape overall and that it now has the leadership it needs to pursue and regain momentum. “Investors whose enthusiasm depends on chief executive bravado and empty bromides should probably look elsewhere, as they won’t get that from Pat Gelsinger,” he said.

During the quarter, Intel also unveiled an ambitious roadmap for its future silicon, with plans to develop new chip and packaging technologies that it said will help it reclaim its leadership of the processor market by 2025. The company aims to pioneer a new “Ångstrom era” of chip design and is developing a new architecture for semiconductors that will enable greater density and smaller sizes than before, and consequently faster, more powerful chips.

In a customer win, Intel landed a big contract to develop and manufacture “cutting-edge” chips for the U.S. Department of Defense.

The company also revealed that one of its top executives, Chief Financial Officer George Davis, has announced his intention to retire in May 2022. Davis, who joined Intel in April 2019 from rival Qualcomm Inc., will stay on until the company appoints a successor.

Looking ahead to the fourth quarter, Intel said it’s expecting $18.3 billion in sales, which is just ahead of Wall Street’s forecast of $18.24 billion.

Photo: SiliconANGLE