Morgan Stanley: Intel’s PC adjustment weighs on fourth quarter; Morgan Stanley raises next year’s earnings forecast but cuts price target

Third-quarter earnings beat expectations, so why did fourth-quarter guidance weaken sharply?

Intel reported third-quarter 2026 revenue of 16.513 billion dollars, slightly below the consensus estimate of 16.555 billion dollars and above Morgan Stanley’s estimate of 16.256 billion dollars. Non-GAAP gross margin was 44.1%, above the market estimate of 42.1%; earnings per share of 0.52 dollars also exceeded the market estimate of 0.41 dollars.
The midpoint of fourth-quarter revenue guidance was 15.5 billion dollars, below the consensus estimate of 17.29 billion dollars; gross margin guidance was 38%, below the market estimate of 42.3%; and earnings-per-share guidance of 0.25 dollars was below the market estimate of 0.45 dollars.
The PC business was the main reason for the downward revision. Intel’s client product prices rose 27% year over year in the second quarter, helping offset weak volumes; but Morgan Stanley believes part of the performance was associated with significant inventory accumulation. The company expects a record decline in the second half, with the inventory impact continuing into the first quarter of 2027.

Third-quarter revenue in the data center and AI business was 7.318 billion dollars, up 78% year over year. But an incident at a fabrication plant in Israel affected production of 10-nanometer server chips, and Morgan Stanley expects an impact of several hundred million dollars per quarter. Substrate shortages will be more severe in the first half of 2027, and the server business could decline sequentially in the first quarter.
The company expects server market shipments to grow by more than 30% in 2027, and the bank estimates market revenue growth could be around 50% after price increases. But revenue growth at AMD and several ARM vendors is expected to reach 70%–100%, so this rate of market growth offers limited upside relative to the bank’s model.

Supported by a stronger server market environment, Morgan Stanley raised its 2027 non-GAAP earnings-per-share forecast from 2.00 dollars to 2.28 dollars and its gross margin forecast from 43.2% to 45.4%; it slightly reduced its revenue forecast for the same period from 71.264 billion dollars to 71.059 billion dollars.
The bank lowered its price target from 84 dollars to 75 dollars and maintained its Equal-weight rating. It changed its valuation method from 42 times non-GAAP earnings to 38 times 2027 ModelWare earnings per share of 1.98 dollars; the latter includes stock-based compensation costs. The bank believes its higher operating margin assumption leaves less room for further improvement after 2027.

Morgan Stanley wants to see Intel regain a performance lead in server CPUs to support the sustainability of earnings. The company said its 2027 flagship product, Diamond Rapids, is affected by the removal of simultaneous multithreading from its design; the bank believes the earliest opportunity to take the lead may come with Coral Rapids the following year.
Management is optimistic about the 14A process and EMIB-T advanced packaging, and expects 14A risk production in 2028 and mass production in 2029. But the company says server demand will remain difficult to meet through 2028, and Morgan Stanley worries that persistent shortages could weaken customers’ confidence in its foundry capacity.
Capacity expansion also requires greater investment. The company expects total capital expenditure in 2027 to be significantly above the 2026 level of more than 20 billion dollars. Management calls 2027 an investment year; Morgan Stanley expects limited free cash generation and sees this as a valuation concern.