Do Intel's weak sales mean the pandemic boom in PCs is over? What investors should know

Published Thu, Oct 21 20218:29 PM EDTUpdated Thu, Oct 21 20218:35 PM EDT

One surprise during Intel's third-quarter earnings on Thursday that sent the stock lower in extended trading was that its PC chip business declined 2%. PC sales had been elevated since the beginning of the pandemic as people needed laptops to work from home, and there are investor concerns that the trend is changing, but Intel said on Thursday that demand for PCs remains high. The problem with PC sales was shortages in the other chips you need to build a full computer, not the CPUs that Intel makes, and Intel CEO Pat Gelsinger mentioned in an interview with CNBC some specific kinds of circuits that were in short supply. "We call it match sets. We may have the CPU, but you don't have the LCD or you don't have the Wi-Fi," Gelsinger said. "Data centers are particularly struggling with some of the power chips and some of the networking or Ethernet chips." Gelsinger said we're in the "worst of" the shortage now and it will get better quarter by quarter, but that the semiconductor shortage will persist until 2023. Back to the same sleepy PC business? One question facing investors in semiconductors or electronics is if the PC boom driven by the pandemic, which reached 55% growth in the first quarter of 2021, established a new floor and path for growth for the category, or if it will return to becoming a sleepy low- or no-growth business again, as it's been for the past decade. The chip shortage is making it more complicated to assess because manufacturers could decide to stockpile when parts are available instead of paying up when faced with longer lead times or more expensive components. Gelsinger acknowledged in the interview with CNBC that he's heard about PC manufacturers, called OEMs, building up inventory, but he said that it was in response to a backlog of orders from manufacturers who are struggling to get power controllers or other parts — the "match set" issue. Analysts started to worry about " peak PC " during the summer as it seemed that sales had slowed and shortages started to abate. In October, market researcher IDC said third-quarter sales in the U.S. were the lowest since before the pandemic. Intel remains optimistic PC sales are on a new path, a sea change driven by the pandemic. "We do think the PC business is now just structurally larger. Million-unit-a-day kind of business now," he said. IDC estimates that 347 million PCs will ship in 2021. Ultimately, though, he doesn't see "anything spectacular in terms of growth rate" next year. "In the PC industry, I think we're going to feel a lot better in the second half of next year around PC, mobile devices as well. But we still got a lot of supply issues to fight through to get to the other side of these very painful issues." Intel provides nearly 80% of processors for the home PC market, according to one estimate . It's also investing heavily to become a foundry, or a factory for chips engineered by other companies. Gelsinger said that it was relatively easy to sign up new customers, like the U.S. government, as foundry capacity around the world remains constrained. "It is so easy right now to show up and say I have leadership process technology, if you can convince them of that. And I'm ready to give you committed capacity," Gelsinger said. "It really is that simple."

One surprise during Intel's third-quarter earnings on Thursday that sent the stock lower in extended trading was that its PC chip business declined 2%.