Morgan Stanley: Intel’s PC Business Brakes Sharply: Server Strength Still Fails to Dispel Valuation Concerns

Why did results beat expectations while guidance turned weak?

Intel reported 2026 third-quarter revenue of 16.513 billion dollars, slightly below the market consensus of 16.555 billion dollars and above Morgan Stanley’s forecast of 16.256 billion dollars; non-GAAP earnings per share were 0.52 dollars, above both forecasts of 0.41 dollars.
The midpoint of fourth-quarter revenue guidance fell to 15.5 billion dollars, below the market consensus of 17.29 billion dollars and the bank’s forecast of 16.759 billion dollars; gross margin guidance was 38%, a marked decline from 44.1% in the third quarter.

Morgan Stanley had hoped price increases would offset weak volumes: client business prices rose 27% year over year in the second quarter, but the bank estimates PC volumes will fall approximately 25% year over year in the second half.
The bank believes some of the earlier price performance reflected a substantial inventory buildup. Intel expects a record decline in the second half, with the inventory impact continuing into the first quarter of 2027, so price increases failed to offset weak volumes as the bank had hoped.

Third-quarter data center and AI revenue rose 78% year over year to 7.318 billion dollars. The company expects server market shipments to grow more than 30% in 2027; Morgan Stanley estimates that, including price increases, market revenue growth could approach 50%.
An incident at an Israeli wafer fab is expected to affect 10-nanometer server products by hundreds of millions of dollars per quarter; substrate shortages will be more severe in the first half of 2027, and first-quarter server revenue could fall sequentially. The bank also expects AMD and several ARM vendors to grow revenue by 70%–100% the following year, so industry expansion adds limited incremental revenue to its Intel forecast.

Driven by a stronger server environment, Morgan Stanley raised its 2027 non-GAAP earnings-per-share forecast from 2.00 dollars to 2.28 dollars. But the bank believes that, after adopting a higher operating margin assumption, there is less room for margins to improve beyond 2027. It therefore lowered its valuation multiple and cut its price target from 84 dollars to 75 dollars, while maintaining its Equal-weight rating.
Intel calls 2027 an investment year; Morgan Stanley expects capital expenditure to rise substantially further from a base exceeding 20 billion dollars, with limited free cash flow generation in 2027. Management is optimistic about 14A foundry services and advanced packaging, and plans risk production for 14A in 2028 and volume production in 2029, but persistent server capacity shortages could weaken customer confidence in foundry capacity.
The bank wants to see a product roadmap capable of achieving server CPU performance leadership before it becomes more confident in the sustainability of earnings. The company says its 2027 flagship Diamond Rapids is affected by architectural design trade-offs, so the bank believes the earliest opportunity to take the lead will be with Coral Rapids the following year, while competitors are also expanding capacity.