J.P. Morgan: Strong Intel server demand, weak PCs and substrate shortages reshape electronic component demand

Why didn’t third-quarter growth translate into strong fourth-quarter guidance?

Intel’s revenue in the third quarter of 2026 was 16.51 billion dollars, up 21% year on year and 2% quarter on quarter, broadly in line with company guidance and Bloomberg consensus estimates. Non-GAAP gross margin was 44.1%, above company guidance and the consensus estimate of 42%, helped by lower manufacturing costs for Intel 3 and Intel 18A and an improved product mix.
The midpoint of fourth-quarter revenue guidance was 15.5 billion dollars, down 6% quarter on quarter and below the Bloomberg consensus estimate of 17.03 billion dollars. The company expects data center and AI revenue to grow by a mid-teens percentage quarter on quarter, but client computing and physical AI revenue to decline by more than 20%. An accident at its Israel plant will also reduce revenue by approximately 300 million dollars.

Third-quarter client computing and physical AI revenue was 8.1 billion dollars, down 5% year on year and 9% quarter on quarter. Rising memory prices and supply shortages weighed on PC demand, and customers accelerated inventory adjustments in the second half of the quarter.
Third-quarter data center and AI revenue was 7.32 billion dollars, up 78% year on year and 17% quarter on quarter. Strong demand from large cloud providers, enterprise customers and emerging cloud service providers, together with expanded supply capacity, drove revenue growth.
Intel expects total PC market shipments to fall 12% year on year in 2026 and a further 10% in 2027. Customer inventory adjustments will continue through the first quarter of 2027, with some effects potentially lasting into the second quarter. Meanwhile, the company expects industry-wide server CPU shipments to grow by more than 30% year on year in both 2026 and 2027.

Intel’s fourth-quarter gross margin guidance is 38%, below the Bloomberg consensus estimate of 42.8% and the third-quarter figure of 44.1%. Lower revenue increases the fixed-cost burden, a higher share of custom chip sales weakens the product mix, and the Israel plant accident will also exert pressure. Improved process yields and lower manufacturing costs are expected to partially offset these effects.
The company maintained its 2026 capital expenditure guidance at 20 billion dollars and expects capital spending to rise substantially and free cash flow to turn negative in 2027. Inventory at the end of the third quarter was 13.1 billion dollars, up 600 million dollars from the end of the second quarter, while inventory days increased by approximately 5 days.

Intel said Intel 3 wafer capacity and the ABF substrates required for advanced packaging are bottlenecks in server CPU supply, and expects tight supply to persist through the first half of 2027. Substrate manufacturers plan to expand capacity by 40%, and Intel expects the effects to become apparent mainly from the second half of 2027.
Intel also plans to shift some PC chip capacity at its Oregon plant to Intel 3 server chips, with production expected to start in the second half of 2027. The company expects server CPU demand to continue to substantially exceed supply throughout 2027 and into early 2028.
JPMorgan believes weak PC demand has no impact on Ibiden because the company is reducing its exposure to the PC business and substrate supply itself is tight. Although Ibiden shares fell after Intel’s earnings report and the revision of Ibiden’s medium-term plan, the bank remains positive on its fundamentals and maintains an overweight rating.