Intel Update

Each week we try to cover 1-2 companies we have discussed in previous podcast|videocast(s) and/or own for clients (including personally).
 

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With Q2 earnings season now in full swing, Intel was the first of our names to report earlier last week.

Headline numbers were strong across the board. Revenue came in at $12.9 billion (flat Y/Y), beating consensus by nearly $1 billion and landing ~$500 million above the high end of management’s prior guidance. In fact, Q2 was the third straight quarter of revenue coming AHEAD of expectations.

Earnings were weighed down by restructuring costs and one time equipment impairment charges. Excluding those, INTC delivered EPS of $0.10, ahead of both prior guidance and consensus estimates of $0.01.

Not only that, but Q3 guidance held up well, with revenue expected between $12.6 and $13.6 billion, compared to the Street’s $12.66 billion. Keep in mind, Q3 has historically posted high single digit sequential growth (current guidance implies –2% to +6% due to potential tariff pull-forward). That sets a low bar for a beat if demand holds up.

But despite the beat and solid guidance, shares fell nearly 10% after the report (in our view, a gift from the gods). What spooked the market and continues to weigh on the stock comes down to the Foundry business and the about face in strategy that Lip-Bu Tan is bringing to the table, and RIGHTFULLY SO. Here is what was added to the 10Q and what Lip-Bu means by making it his top priority to “Become a More Financially Disciplined Foundry.”

If we are unable to secure a significant external foundry customer for Intel 14A, our next generation semiconductor manufacturing process technology, we may pause or discontinue our pursuit of next generation leading-edge process technologies, which may have significant strategic business, financial, operational and reputational risks and repercussions.

This is a complete U-turn from Pat Gelsinger’s “build it and they will come” mentality. In Lip-Bu Tan’s own words,

“Over the past several years, the company invested too much, too soon—without adequate demand, Going forward, our investment in Intel 14A will be based on confirmed customer commitments. There are no more blank checks. Every investment must make economic sense.”

The market’s reaction to the comments looks like it had a heart attack. After plowing more than $95 billion over the past four years into what former CEO Pat Gelsinger called “the biggest bet we have ever made as a company,” the shift in strategy is being viewed as putting Foundry’s future in jeopardy, meaning without landing an external customer, no 14A, and no future Intel internal production.

We have a MUCH DIFFERENT take.

The Foundry business has been a cash incinerator for years, losing $3.2 billion this quarter alone, with an operating margin of -71.7%. There is no planet where that is sustainable, and Lip-Bu Tan has made it clear he is not willing to eat those losses forever. Until Intel sees external customers stepping up with volume commitments, they are scaling back the massive capex buildout. In other words, they are no longer holding the bag.

And believe it or not, they actually have leverage here.

Intel is one of only three leading-edge chip fabs left in the world. No company that is currently relying on the kindness of strangers for advanced foundry, whether it is Nvidia, Amazon, or anyone else, wants to have all their eggs in the TSMC basket. This is essentially a warning shot to engage and get serious, or Intel will walk away from the Foundry business. No company in their right mind wants that.

At the same time, it doesn’t hurt to have the US Government as your co-investor and subsidizer-in-chief. The government is committed to reducing dependence on Taiwan Semiconductor (monopoly) and creating a duopoly (Intel). I wouldn’t bet against the richest Treasury in the world to make that happen. Many bet against the government’s commitment to EVs through Tesla subsidies. Ask them how that turned out. The fact of the matter is that the US cannot afford to let Intel struggle.

And just last week, we got further confirmation with the AI Action Plan, showing exactly how serious they are:
 

 

But again, while all the focus is on Foundry and reinventing the future, our original thesis has always been that AI and Foundry are just whipped cream on top. We continue to believe the legacy PC and server business, which makes up ~60% of sales, is worth $45 to $50 per share on its own. That gives us all the margin of safety we need and makes the short-term noise and uncertainty exactly that, just noise.

People seem to forget that despite all of Intel’s issues, they are still like we like to call “the leader of mediocre chips.” They continue to dominate market share in both PCs and servers, with 70 to 80% share in the client PC market and ~55% in servers. This remains the core of our thesis, and Lip-Bu Tan has made it clear that this is where the focus needs to be. They are fully committed to doubling down, engaging with customers early in the product cycle, and winning back share.

That is music to our ears.

And let’s not forget, we have a miracle worker at the helm in Lip-Bu Tan. The chart of Cadence Design before and after he took over says everything you need to know. He stepped in after an 86% collapse in the stock. Over the next 14 years, CDNS became a 68-BAGGER.
 

Intel is his next turnaround project, and in his own words, he wants to “pull off a comeback that will be studied in business schools for generations.” If there is one person who can pull that off, it’s him.

Lip-Bu Tan would have never taken the job if he didn’t truly believe Intel could be turned around. He spent two years on the board before resigning, clearly in disagreement with Pat Gelsinger’s spending spree and direction. The point is, he knows the business inside and out, and there are no surprises for him. He isn’t chasing money. The only thing he is chasing is admission into the semiconductor CEO hall of fame.

And if his track record wasn’t enough, within 30 days of taking the job, he wrote a $25 million dollar check out of his own pocket at a $24 cost basis. That puts us invested pari passu, or in some cases well below, one of the best operators in the industry. Betting against Lip-Bu Tan has never been a profitable trade, and we don’t think this time will be any different.

Here’s everything you need to know following Q2 earnings:

Q2 Earnings Breakdown
 

 

 

 

 

 

10 Key Points

1) Revenue of $12.9 billion beat consensus by roughly $1 billion and came in nearly $500 million above the high end of prior guidance. Intel Products revenue reached $11.8 billion, up slightly sequentially and ahead of expectations across both client and server segments. On the client side, demand continues to benefit from the COVID-era PC refresh cycle, with AI PCs representing a growing share of the mix. In the server business, Granite Rapids is ramping as planned as hyperscalers continue to refresh their CPU installed base.

2) Gross margins are expected to face near-term pressure due to the significant ramp-up of Lunar Lake in Q3 and Panther Lake later this year, as cost per wafer remains high in the early stages. However, as volumes increase, management expects gross margins to expand in 2026 and continue improving for several years. Management anticipates 40% to 60% fall-through for gross margins next year, leaning toward the high end if volumes scale as expected.

3) Management remains on track to achieve the 2025 operating expense target of $17 billion, with plans to reduce opex further to $16 billion next year.

4) 18A reached a key milestone with the start of production wafers in Arizona and remains on track for introduction by the end of 2025. It will serve as the foundation for at least the next three generations of Intel client and server products. Most importantly, management continues to expect reasonable returns on investment from Intel products alone. However, as 18A ramps up to high volume, management expects to be in a stronger position to attract external customers as performance and yields improve, driving very strong returns over the long term.

5) The first Panther Lake processor SKU remains on track to begin shipping later this year, with additional SKUs coming in the first half of 2026.

6) Intel Foundry revenue rose 3% year over year to $4.4 billion but continues to bleed significant cash, posting an operating loss of $3.2 billion, up from a $2.8 billion loss a year ago. Lip-Bu Tan’s top priority is to “become a more financially disciplined Foundry,” scaling back capex until there are firm customer volume commitments for 14A. As part of this shift, INTC canceled manufacturing projects in Germany and Poland and slowed construction in Ohio to better align with market demand.

7) Management announced additional layoffs, building on the 15% reduction announced last quarter, with a target of cutting headcount to 75,000 employees by year-end. That compares to a peak of 132,000 under Gelsinger, with most of the reduction already complete. As a result, the company has eliminated 50% of management layers and remains on track to implement its return-to-office mandate beginning in September.

8) Capital expenditures for the full year are expected to total $18 billion, ~$5 billion below the original guidance set at the start of the year. Management noted that maintenance capex accounts for about half of the current level, or roughly $9 billion, and expects both gross and net capex to decline further in 2026.

9) Deleveraging the balance sheet is a top priority in 2025. Management raised $922 million through the Mobileye offering in July and is on track to complete the $4.46 billion sale of the Altera stake in Q3. Additional opportunities to monetize noncore assets are also under review.

10) Q3 guidance includes a revenue range of $12.6 to $13.6 billion (down 0.2% YoY), gross margins of 36% (up 18 bps), and EPS of $0.00 (up $0.46 YoY). Revenue guidance assumes prior quarters benefited from tariff pull-forward, with management conservatively projecting growth of -2% to +6%. Traditionally, Q3 sees high single-digit sequential growth, setting a low bar if demand holds up.

Earnings Call Highlights
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PayPal Update

 

 

PayPal delivered yet another LIGHTS OUT quarter this week. Revenue of $8.3 billion (up 5.1% YoY) beat consensus by $220 million, while non-GAAP EPS of $1.40 came in $0.10 ahead of expectations. Management also raised full year EPS guidance to $5.15 to $5.30 from $4.95 to $5.10 and lifted full year Transaction Margin $ (essentially gross profit) to $15.35 to $15.5 billion from prior guidance of $15.2 to $15.4 billion.

Going through the earnings call, it is hard to find anything not to like. The highlight color is OVERWHELMINGLY green.

The one soft spot was adjusted free cash flow, which came in at just $656 million, down 42% YoY and well below the $1.62 billion the Street expected. In typical shoot first ask questions later fashion, that was enough for Mr. Market to send the stock down nearly 10%.

That sell-off looks even sillier when you realize the slowdown was ENTIRELY due to timing shifts in working capital, not any slowdown in the business or permanent impairment. These effects are expected to reverse in the second half. If you are an INVESTOR and not a TRADER, the only number that should matter is management’s reaffirmed full year free cash flow guidance of $6 to $7 BILLION, which implies a nearly 10% FCF yield at the midpoint. But sure, sell the stock because free cash flow is lumpy (which has long been the norm for PayPal).

To those who saw these results, listened to the call, and still decided to sell, we will gladly be mailing you Christmas cards for the next few years. You just handed us a gift to add to our position at BARGAIN PRICES. We already knew Alex Chriss was a WINNER based on what he accomplished leading the small business group at Intuit, but each quarter continues to raise our confidence EVEN HIGHER.

Remember, short term voting machine, long term weighing machine. I have built my career on finding opportunities where PRICE disconnects from improving FUNDAMENTALS. And when investors are bending over backwards to find reasons to sell, just know that DESPONDENCY tends to revert to EUPHORIA. That flip might be closer than anyone realizes.

We will be happy to return the early Christmas favor and hand out some shares when the stock is trading over $150+

Here’s everything you need to know following Q2 results:

Q2 Earnings Breakdown
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10 Key Points

1) PayPal posted its sixth consecutive quarter of profitable growth, with transaction margin dollars reaching $3.84 billion, up 7% YoY (8% excluding interest on customer balances). Transaction margin rose to 46.4%, up 62 bps YoY. Declining transaction margin dollar growth had always been central to the bear case, with drops of -3% in 2022 and -5% in 2023. Alex Chriss has flipped that on its head, delivering 5% growth in 2024, guiding for another 5 to 6% in 2025, and targeting high single-digit growth by 2027 with a long-term ambition of 10%+.

2) Venmo posted revenue growth of over 20%, its highest since 2023. Total payment volume (TPV) grew 12% during the quarter, accelerating quarter over quarter to the fastest rate in three years. Pay with Venmo TPV grew more than 45%, while monthly active accounts for the Venmo debit card rose over 40%. These debit users have some of the most attractive economics in the ecosystem, with both Venmo and PayPal debit card users showing 6x the transaction activity and 3x the average revenue per account. We have always said Venmo is a verb, and when Alex Chriss took over, there were real doubts about whether Venmo could return to growth. Fast forward to today, it is on track for well over $2 billion in revenue by 2027 and just getting started…

3) One of the most important pivots in strategy under Alex Chriss has been choosing profitable growth over what he called “empty calorie” revenues, AKA firing unprofitable PSP (Braintree) customers. As expected, Braintree TPV growth has slowed dramatically, posting just 2% for the past two quarters, down from 18% a year ago. With PSP consistently making up over 40% of total TPV, this shift created a short-term revenue headwind of roughly 5% in recent quarters. The good news is that not only have transaction margin dollars improved meaningfully, but the business has also reached an inflection point. Management expects Braintree TPV to reaccelerate in the second half of the year and beyond, following peak pressure from contract renegotiations and the removal of low-margin volumes.
 

4) Online branded checkout grew 5% YoY, a slight deceleration from 6% growth in the prior quarter and one of the few soft spots in the report. The slowdown was driven by weakness in tariff-impacted regions such as Asia-based marketplaces. Without that pressure, growth would have held steady at 6%. The good news is that softness has already stabilized in Q3. Management continues to guide for full-year growth in the mid-single digits, with improvement expected over the coming quarters and a path toward 8 to 10% growth by 2027. This is largely driven by continued adoption of the new checkout experience, which made up 30% of US branded as of February 2025 and has already reached over 60%, on track to exceed 80% of global transactions by 2027.

5) Buy Now Pay Later continues to accelerate, with volume growth of more than 20% and monthly active accounts up 18%, outpacing the overall market as PayPal gains share in the space. These customers bring highly attractive economics, with average order value more than 80% higher than a standard checkout transaction. Management also noted ongoing improvements in charge-offs and stable, low delinquency rates, with plans to expand into additional markets and increase marketing efforts throughout the year.

6) Total active accounts grew by nearly 2 million from Q1, up 2% for the quarter, reaching an ALL TIME HIGH of 438 million. Monthly active accounts also rose 2% YoY to 226 million as the largest two-sided platform in the world continues to get bigger.
 

7) Adjusted free cash flow for Q2 came in at just $656 million, well below Street consensus of $1.62 billion. While the soft number caught the market off guard, management said this was simply due to timing shifts in working capital that are expected to reverse in the second half. More importantly, they reiterated full-year free cash flow guidance of $6 to $7 billion, implying a nearly 10% FCF yield at the midpoint.

8) Share repurchases totaled $1.5 billion for the quarter, bringing the trailing twelve-month total to $6 billion and reducing the share count by ~7%. Management still expects to buy back $6 billion of stock this year, implying a buyback yield of well over 8% at current prices. With $13.7 billion in cash and investments versus $11.5 billion in debt, we think there is plenty of dry powder for management to ramp up repurchases if Mr. Market continues on one of his manic bouts.
 

9) Management noted that recent talk of certain banks charging for access to consumer data, which triggered a sharp sell-off in the stock, is immaterial to PayPal. They confirmed the company will not be impacted by any such pricing changes.

10) Management raised full-year guidance, now expecting Non-GAAP EPS of $5.15 to $5.30 (11 to 14% growth) compared to prior guidance of $4.95 to $5.10 (6 to 10% growth). Transaction margin dollars were also raised to a range of $15.35 billion to $15.5 billion (5 to 6% growth) versus previous guidance of $15.2 billion to $15.4 billion (4 to 5% growth). They reaffirmed free cash flow estimates of $6 billion to $7 billion, share repurchases of $6 billion, and capital expenditures of around $1 billion. This guidance still looks relatively conservative, with the low end assuming “up to a couple of points” of deceleration in e-commerce spending, though management has seen no evidence of this so far.

Earnings Call Highlights
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quick Boeing Update

We have had a lot of companies report fantastic earnings this week and will be covering all the names in detail in the coming weeks.

But just to hit on a few quick points on Boeing. If you want to see a textbook example of DESPONDENCY reverting to EUPHORIA, look no further than Boeing. Just a few months ago, you couldn’t give the stock away in the $130s. We were on an island saying we were bullish and got looked at like we had three heads. Now at $225, it’s all anyone wants to talk about.

As for Q2, it all comes down to just two words: Kelly Ortberg.

In his own words, 2025 is Boeing’s turnaround year. We could not agree more.

As we always say, the #1 thing you want to see in a turnaround is free cash flow, especially for a company like Boeing, and they absolutely delivered. Adjusted free cash flow for the quarter was a usage of just $200 million, compared to consensus estimates of a $1.79 billion usage and a year ago figure of -$4.3 billion. Management now sees a usage of just $3 billion as a reasonable full-year target compared to prior guidance of a $4-5 billion cash burn. Most importantly, the long-term $10 billion free cash flow target remains intact…

That free cash flow is being powered by a business firing on all cylinders. Boeing recorded the highest number of deliveries in both Q2 and the first half of the year since 2018, along with its strongest quarterly revenue in six years. Meanwhile, the 737 program is now running at a production rate of 38 per month and is expected to climb to 42 in the months ahead.

Ladies and gentlemen, this thing is just getting started. Many thanks to Kelly Ortberg for his miracle work in progress.

More to come next week…
 

General Market

The CNN “Fear and Greed Index” ticked down to 69 this week from 76 last week. You can learn how this indicator is calculated and how it works here: (Video Explanation)
 

The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) ticked down to 81.07% this week from 83.69% equity exposure last week.
 

Our podcast|videocast will be out sometime today. We have a lot of great data to cover this week.  Each week, we have a segment called “Ask Me Anything (AMA)” where we answer questions sent in by our audience. If you have a question for this week’s episode, please send it in at the contact form here.

*Opinion, Not Advice. See Terms

Not a solicitation.

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