The world’s biggest chip maker, Intel Corp., reported stellar $19.8 billion revenue for Q1, but is painting a grim picture for Q2. “Management is sending strong signals that the company is about to head into possibly the toughest times it has ever witnessed,” according to one analyst.

In the semiconductor industry, volatility is the norm, but Intel has long been an exception. Going into Q2, the company is citing capacity constraint; is struggling to ramp its 10nm process; and faces the economic uncertainty that Covid-19 has wrought on the electronics industry. As Intel flounders on the process side, according to analysis firm EnerTuition, Advanced Micro Devices Inc. is gaining share at Intel’s expense.

What’s behind Intel’s sudden reversal of fortune?

Covid-19 was actually a boon for the chip industry as demand surged from datacenters, consumer products and IoT/mobile developments — a trend that will continue into Q2. Intel’s Q2 guidance was mixed, however. Revenues are forecast to be above consensus; EPS forecast fell below consensus; the company dropped its Q2 gross margin forecast and pulled full-year 2020 guidance.

EnerTuition posed three explanations for Intel’s pessimism:

Intel’s server mix is significantly worse than Q1. The guidance reflects that Q1 datacenter business was up ~43% year-over-year, but Q2 datacenter is guided to be only up ~25% year-over-year. Is this near 18-point drop due to reduced customer demand or because AMD taking significant server market share in Q2? Or, both?

Work-at-home growth is being offset by Covid-19 demand reductions elsewhere.

AMD is taking significant amount of incremental client share in Q2.

Intel’s management is also citing supply constraints, which usually boost revenue. Channel checks show Intel inventory has been stripped bare, which would normally spur price increases and a replenishment cycle.

“Even without these trends, Q2 is typically a seasonally up quarter,” said EnerTuition. “Intel guidance is not showing any of these upsides.”

Q1 breakdown

What already was a strong datacenter market coming into the quarter became stronger during the quarter due to the Covid-19 work-at-home drive. This $5 billion-per-quarter business for Intel grew 43% year-over-year.

On the datacenter product front, Intel claims to be sampling Ice Lake server and guided for Q4 volumes. While this is a laggard product and not a great positive, it indicates progress in the company’s 10nm process, EnerTuition said.

The trends also were very favorable for client computing. Demand was driven by Covid-19 home workers, and reports suggested that laptops became hard to find toward the end of the quarter. Intel laptop CPU units grew by 22%. On the flip side, desktop units seem to have declined by about 6%.

The most critical new product on the client front is the Tiger Lake CPU which Intel expects to launch mid-year. While it’s unclear how this product will compete with AMD’s new Ryzen 4 series chips, said EnerTuition, the mid-year launch is positive, helping Intel blunt some of the forays AMD is making into the laptop market.

Other parts of Intel business also have done reasonably well, the firm said, with Mobileye and NAND/Optane business leading the way. Management claimed that Mobileye got a major Asian car brand design win, which makes it difficult for Nvidia and other AI alternatives to gain traction.

Competition and cost pressure

Management admitted that Intel’s 10nm process will not cross over 14nm process in volumes in 2020. “In context, Intel’s margin guidance suggests that the company could be seeing cost pressure from 10nm ramp or ASP pressure from AMD,” EnerTuition said. “Regardless of the exact factors in play, this does not bode well for Intel investors.”

The Tiger Lake ramp is likely much smaller than historic levels and most of Intel’s client product will continue to be based on the older generation 14nm technology, the research firm said. It appears that Intel is being forced to ramp a low-yielding 10nm process due to competitive threat from AMD. This dynamic, along with ASP declines, is likely at the root of gross margin declines.

Intel noted that it will have about 50 laptop designs for the Christmas season; AMD claims 135+ laptop designs with the Ryzen4 family. “This may be the first time in the history of x86 business when Intel’s newest chip has fewer design wins than AMD alternatives going into the holiday season,” said EnerTuition. “It’s unclear if this is because Tiger Lake is arriving late to the market or because OEMs find Tiger Lake to be not attractive or because Intel is still struggling to ramp its 10nm process.”

Management is sending strong signals that the company is about to head into possibly the toughest times it has ever witnessed. In preparation, Intel has:

Raised $10.3B in new debt

Suspended share buybacks

Reducing or pushing out non-core capex budget into 2021

“The actions to strengthen liquidity alone have chopped $0.12 from Q2 EPS,” EnterTuition concluded. “It’s fair to expect that impact in Q3 and Q4 will be similar or worse.”