Citi: Intel’s data-center demand is strong, but capacity constraints and PC weakness slow profit recovery

Why did Citi cut its price target despite a strong third quarter?

Intel’s third-quarter results significantly exceeded Citi’s expectations, but its fourth-quarter outlook was weak: an incident-related shutdown at Israel’s Fab 28, weak PC demand and insufficient supply combined to create pressure.
Citi cut its 2026 and 2027 earnings-per-share forecasts from 1.28 dollars and 1.81 dollars to 1.01 dollars and 0.85 dollars, respectively. It lowered its price target from 130 dollars to 100 dollars and maintained its Buy rating.
The bank expects revenue to rise 9.4% year over year in 2027, but earnings per share to fall 16.1%; revenue expansion and profit recovery are not progressing in step.

Third-quarter data-center and AI revenue rose about 80% year over year and 17% quarter over quarter, driven by expanding AI demand and improved server CPU supply. The company guided for revenue in the business to rise about 15% sequentially in the fourth quarter.
Demand continues to exceed supply for Intel 3 wafer capacity and the substrates needed for advanced packaging. The company expects additional capacity in Oregon and more substrate supply to bring more meaningful relief in the second half of 2027, making full-year growth more weighted toward the second half.
The Israeli fab shutdown further constrains server supply: management expects an approximately 300 million dollar impact on fourth-quarter 2026 revenue and initially assumes a similar impact in the first quarter of 2027; more than nine-tenths of the fourth-quarter impact relates to server products.

Memory shortages and rising prices have prompted PC manufacturers to reduce inventories. Intel expects industry PC shipments to fall about 12% in 2026 and another 10% in 2027; the company guided for client computing revenue to decline more than 20% sequentially in the fourth quarter.
Management expects inventory adjustments to last roughly through the first half of 2027, with shipments and end consumption converging in the second half, but describes this as inventory normalization rather than a demand recovery.

Third-quarter gross margin was 44.1%, above company guidance, benefiting from lower process costs, improved yields and a higher server business mix. Fourth-quarter gross margin guidance fell to 38%, including an approximately 200-basis-point impact from the Israeli fab shutdown.
Gross margins on custom chips, advanced packaging and external wafer sales are below Intel’s historical company average. Management is prioritizing additional revenue and gross profit dollars, so Citi expects gross margin to recover more slowly than revenue grows.
Capacity expansion also requires funding: the company maintained its outlook for approximately 20 billion dollars in total capital expenditure in 2026, expects a significant increase in 2027, and said free cash flow is not expected to be positive in 2027 as it works to ease supply constraints and support growth.

Intel said 18A yields improved by a double-digit amount, faster than internal expectations; 18A client CPUs already account for nearly one-third of client CPU revenue. The company expects to launch 18A-P by year-end, and it continues to attract interest from external customers.
Citi remains positive on Intel’s technology and foundry vision, but believes earnings growth also depends on how quickly it brings in external foundry customers. Management said customers will decide for themselves when to disclose foundry or packaging partnerships.