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Mixed Signals Muddle Intel's PC Comeback

Motley Fool - Sun Dec 3, 2023

Global shipments of PCs have been declining for the past two years following a pandemic-era splurge by consumers and businesses. Lower end-market demand coupled with excessive inventory levels across the PC supply chain has been wreaking havoc on the PC chip businesses of both Intel (NASDAQ: INTC) and Advanced Micro Devices.

There now appears to be light at the end of the tunnel. Gartner expects PC shipments to return to growth in the fourth quarter, and Canalys is calling for 5% growth in the fourth quarter and 8% growth in 2024. These forecasts hinge on an improving macroeconomic environment and an upgrade cycle driven by artificial intelligence (AI)-enabled laptops.

Canalys expects 19% of PCs shipped next year to be AI-capable, which would include Apple's M-series Macs and systems built around Intel's upcoming Meteor Lake processors. Meteor Lake chips will feature dedicated AI hardware, enabling some AI tasks to run without requiring a cloud-based service and without bogging down the central processing unit (CPU) or graphics processing unit (GPU).

Not so fast

While optimism surrounding a PC recovery appears to be building, at least one data point suggests the recovery may be slower than expected. PC giant Dell Technologies (NYSE: DELL) reported its third-quarter results last week, and the company's guidance was surprisingly pessimistic. One caveat is that Dell's quarters don't align with the calendar quarters, so it's not quite an apples-to-apples comparison. Even so, Dell is clearly being conservative with its outlook.

Dell's client solutions group, which contains PCs and PC-related products, suffered an 11% year-over-year revenue decline in the fiscal third quarter. That's not too surprising, given the global PC market stumbled in the calendar third quarter.

Looking ahead to Dell's fiscal fourth quarter, which kicked off on Nov. 4, the company expects client solutions group revenue to decline by a low single-digit percentage compared to the fiscal third quarter. Dell's results may not be a great proxy for the PC market as a whole, but it is the third-largest vendor globally. For global PC shipments to grow on a year-over-year basis in the calendar fourth quarter, they would need to increase from the third quarter.

Dell did note in its earnings presentation that it's excited about AI-enabled PCs and Arm-based Windows devices and that it expects these developments to drive a PC refresh cycle. But that refresh cycle may not begin in earnest until sometime in 2024, based on Dell's outlook.

Uncertainty reigns

The big question is whether the innovations coming in the PC industry will trigger users to upgrade. Many consumers and businesses bought new PCs during the first two years of the pandemic. There needs to be something big to convince those users that an upgrade is in order.

Intel's Meteor Lake has the potential to be exciting enough to trigger an upgrade cycle. These are the first PC chips from Intel that are disaggregated, with multiple tiles stitched together. This brings potential improvements to performance and efficiency, as Intel can use different manufacturing technologies for each tile. The CPU tile will use Intel's brand-new Intel 4 process, the first from the company to employ extreme ultraviolet (EUV) lithography, while the GPU tile will use a 5nm process from TSMC.

Meteor Lake will also feature a neural processing unit, which can accelerate AI workloads while freeing up the CPU and GPU. Some big software companies are already on board. Premiere Pro from Adobe, for example, can make use of dedicated AI hardware to power features like Auto Reframe and Scene Edit Detection. For power users and creatives, Meteor Lake systems could be compelling.

The economy and consumer spending are wildcards, though. There may be a limited appetite for new PCs throughout 2024 despite innovative products. And it's anyone's guess where the PC market will settle once the pandemic is far enough in the rearview mirror. Prior to the pandemic, global PC shipments were stuck in a slow decline.

Part of Intel's turnaround requires a recovery in PC demand. It will happen eventually, but it may take longer than some are expecting.

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Timothy Green has positions in Intel. The Motley Fool has positions in and recommends Adobe, Advanced Micro Devices, Apple, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Gartner and Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2024 $420 calls on Adobe, long January 2025 $45 calls on Intel, and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.

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