Intel beats expectations, but AI chip Gaudi disappoints

Struggling chipmaker Intel's latest earnings report generated optimism among investors despite a setback in the fast-growing market for AI chips in the data center.

On Thursday, Intel forecast revenue for the current quarter between $13.3 billion and $14.3 billion, slightly higher than Wall Street estimates. The forecast drove shares up more than 9% in extended trading following the release of third-quarter earnings, which ended in September.

The bump in the stock price indicated investors saw progress in Intel's plan, launched in August, to tackle its cash shortage by slashing headcount by 15%, or more than 15,000 jobs, and suspending dividends until the end of the year. Intel has set a goal of cutting capital expenditures by $10 billion in 2025.

Intel's financial problems stem from being blindsided by the market shift toward chips that run AI models in large, hyperscale data centers. AI market leader Nvidia reported $30 billion in revenue in the quarter ending July, an increase of 122%. More than 87% of the revenue came from its data center chips.

Intel's AI chip, the Gaudi, has failed to make a dent in the market.* During the company's earnings call, Intel CEO Pat Gelsinger told Wall Street analysts that the company wouldn't meet its revenue target of $500 million for Gaudi by the end of this year.

Pat Gelsinger

"The overall uptake of Gaudi has been slower than we anticipated," Gelsinger said.

Intel's sales target for Gaudi was too optimistic from the beginning, said Jack Gold, principal analyst at J.Gold Associates. "They're becoming more realistic."

Most AI chips sold today are used to train generative AI models, a task Gaudi does not excel at, Gold said. Nvidia's H100, H200, and Blackwell processors are better for that chore, along with AMD's MI300X, which competes with the H100.

This week, AMD, a distant second to Nvidia, raised the sales forecast for the MI300X in the current quarter from $4.5 billion to $5 billion.

Intel's sales and profits declined in the September quarter. The company reported a 6% drop in year-to-year revenue to $13.3 billion and a loss of 46 cents a share, excluding certain items.

A positive in Intel earnings was in its data center business, primarily driven by sales of CPUs for running traditional enterprise applications. Revenue rose 9% to $3.3 billion.

Intel expects its data center business to grow as enterprises testing GenAI applications move them into production on servers running Gaudi processors to fine-tune AI models for specific tasks. Gaudi is capable of inferencing and is significantly less expensive than the chips made by AMD and Nvidia today.

Gartner predicts GenAI will contribute to a near-doubling of server sales from $134 billion in 2023 to $257 billion in 2025.

"We see the market coming more toward us," Gelsinger said.

David Nicholson, chief research officer at The Futurum Group, agreed. Intel's roadmap for Gaudi and the Xeon data center CPU is in line with the market's direction.

"I see a self-sustaining, long-term, solid business once they get everything whittled down," Nicholson said, referring to Intel's money-losing chip factories.

Nicholson believes Intel should spin out the foundry business to free up resources for designing chips. "It's a boat anchor around the survival of the rest of the business," he said.

Gelsinger does not see the company's foundries the same way. His turnaround plans hinge on manufacturing processors for other chip designers, even competitors. Intel's foundries are a separate business unit within the company.

Intel's foundry revenue declined 8% in the previous quarter to $4.4 billion. Gelsinger told analysts he doesn't expect the business to improve significantly for a couple of years.

Intel plans to start building its future chips using an advanced manufacturing process called 18A in the first half of next year. Some analysts expect 18A to attract more third-party chip designers eventually.

Gelsinger argues that the worst is behind Intel, and the cost-cutting that started in August will pay off.

"The first phase was very much about getting back in the game," he said.

*Editor's note: This article cited Gaudi 3 when it originally published instead of current versions of Gaudi. We corrected and regret the error.

Antone Gonsalves is an editor at large for TechTarget Editorial, reporting on industry trends critical to enterprise tech buyers. He has worked in tech journalism for 25 years and is based in San Francisco. Have a news tip? Please drop him an email.