Intel's stock rout obscures a growing opportunity in the AI server market
The chipmaker's weak forecast and PC slowdown have rattled investors, but server CPU revenue surged 78% and demand is outstripping its ability to supply customers.
Intel’s quarterly report, released on Thursday, reignited long-standing investor concerns about the chipmaker’s current condition and future prospects. A decline in revenue from its PC business, combined with a disappointing forecast for the fourth quarter, sent its shares plunging 28.6% on Friday, wiping more than $100 billion off its market value in their second-worst trading session since 1974.
Yet just as the influx of investors and the stock’s surge during the first half of the year may have reflected excessive optimism about the company’s progress, the latest selloff may represent an equally excessive reaction to a single report. The results were mixed, and the outlook was disappointing, but several underlying trends suggest Intel may be in a stronger position than the share price implies.
Intel’s third-quarter results were, at best, mixed. Revenue increased 21% year over year to $16.5 billion, broadly in line with analysts’ forecasts. Net income attributable to Intel fell 18% to $3.3 billion. However, the comparison was affected by a $5.5 billion gain from the sale of a controlling stake in Altera, which Intel recorded in the third quarter of 2025. On a non-GAAP basis, which excludes certain items, net income rose 169% to $2.8 billion.
The main source of investor disappointment was the company’s forecast for the current quarter. Intel expects revenue of between $15 billion and $16 billion, below Wall Street’s previous expectations of approximately $17 billion. It forecast GAAP earnings of 10 cents per share and non-GAAP earnings of 25 cents per share.
Ironically, the cautious outlook is largely a consequence of the same trend that has fueled Intel’s recent growth: the AI revolution. The expansion of AI infrastructure is generating enormous demand for server processors, but the resulting pressure on the supply of memory chips is also pushing up the cost of personal computers and weakening demand for Intel’s PC processors.
There are legitimate questions about Intel’s ability to navigate these opposing forces. But a closer look at the company’s results and the comments made by CEO Lip-Bu Tan during the earnings call suggests that the market’s reaction may have overlooked some important sources of growth.
The server opportunity
Intel’s Data Center and AI division reported revenue of $7.3 billion, an increase of 78% from a year earlier. This was the segment’s strongest growth in 15 years, reflecting surging demand for server CPUs as AI workloads increasingly involve not only training models but also running them and coordinating the work of AI agents.
Tan described the broader industry as facing one of the most significant supply shortages in its history, driven by demand for what he called “super intelligence.” He said Intel had made progress increasing server supply during the quarter, but acknowledged that keeping pace with demand would remain difficult.
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“I am mindful about the ongoing challenges we face in the future quarters to keep pace with the server demand,” he said.
The growing importance of CPUs in AI infrastructure is also creating an opportunity for Intel beyond its traditional server business. While GPUs are widely used to train AI models and handle demanding parallel computing tasks, CPUs play an increasingly important role in orchestrating workloads and carrying out the many tasks required by AI agents.
“While GPUs are great at thinking tasks, deterministic CPU are far more efficient at doing tasks,” Tan said. He estimated that the market for server CPUs could grow fivefold over the next five years, from approximately $40 billion to more than $200 billion.
Intel is already seeing the effects of that demand. Its Granite Rapids server processors, manufactured using the Intel 3 process, have become one of its fastest-ramping server products. Its Clearwater Forest processors, based on Intel 18A, have begun generating revenue, while its next-generation Diamond Rapids processors are on track to ramp up in 2027.
The company has also announced an agreement with Oracle Cloud Infrastructure to deploy its latest-generation CPUs. Tan said Intel was seeing interest from multiple customers in long-term supply agreements.
The problem is that Intel cannot yet produce enough chips to meet demand. Tan said the company’s immediate focus was increasing supply, while acknowledging that manufacturing capacity, packaging materials and other constraints would continue to limit output.
“I’m disappointed that we were not able to meet strong customer demand in this quarter,” he said. “But I remain confident in our path forward.”
Tan also pointed to a number of steps intended to expand production. Intel plans to bring additional Intel 3 capacity online in Oregon in the second half of next year, while continuing to improve yields at its existing facilities. The company expects industry-wide supply constraints to persist throughout 2027 and into 2028, suggesting that its ability to increase output could remain a decisive factor in how much of the market it captures.
The company’s ability to meet demand was also affected by the explosion at its Kiryat Gat plant in Israel earlier this month, which killed two workers and led to an extended shutdown. Tan referred to the incident during the call, saying: “Finally, early this month, an unfortunate and tragic accident led to an extended shutdown in our Israel factory. While the teams have worked quickly to address the situation, it will impact our Q4 10-nanometer server shipments.”
CFO David Zinsner estimated that the shutdown would reduce fourth-quarter revenue by approximately $300 million, with a similar impact possible in the first quarter. Almost all of the expected impact relates to 10-nanometer server products. The figure is significant, but it does not explain the full gap between Intel’s forecast and Wall Street expectations.
AI is also hurting Intel’s PC business
A larger challenge is emerging in Intel’s other major business. Revenue from its Client Computing and Physical AI division, which includes PC processors, fell 5% year over year to $8.1 billion.
The irony is that the same AI infrastructure boom driving demand for Intel’s server processors is also contributing to weakness in its PC business. The rapid construction of data centers has increased demand for memory chips, pushing up prices and tightening availability. Higher component costs are feeding through to the prices of computers and other consumer devices, putting additional pressure on corporate IT budgets.
Tan said Intel’s customers had begun warning of a slowdown in the PC market as memory prices rose and availability tightened.
“In recent weeks, our customers began signaling a PC slowdown based on the memory prices and availability,” he said. “Year-to-date system endpoint prices have increased significantly, placing additional pressure on already limited IT budgets.”
He added that the downturn had accelerated in recent months as computer manufacturers adjusted their inventories to reflect weaker demand.
“The pace of this PC correction has accelerated over the last two months as our OEM partners are aggressively managing inventory to match the softer sell-through,” Tan said. “We expect the current environment to persist until memory availability and prices begin to normalize.”
The impact is already visible in Intel’s guidance. The company expects revenue from its PC division to decline by more than 20% sequentially in the fourth quarter as customers reduce inventories and adjust purchases to their expectations for 2027. Intel does not expect a sustained recovery in the broader PC market until memory availability improves and prices begin to normalize.
The company is nevertheless seeing pockets of growth. Revenue from chips designed for AI PCs increased 35% year over year, while demand for its energy-efficient Wildcat Lake processor has outstripped supply. CFO David Zinsner said Wildcat Lake unit sales increased approximately 70% sequentially during the quarter and that the product was sold out.
The longer-term question is whether the current memory shortage will eventually ease and allow PC demand to recover. Intel is preparing for another difficult year in 2027, forecasting that the overall PC market will decline by approximately 10% in unit terms. But it believes its product lineup, including the upcoming Nova Lake processors, could help it gain market share as conditions improve.
Foundry progress, but much work remains
Another potentially positive development in Intel’s report was the performance of its foundry division, which manufactures chips for both Intel and external customers. Revenue rose 58% year over year to $6.7 billion.
The increase, however, should be viewed in context. Much of Intel Foundry’s revenue comes from manufacturing chips for Intel’s own product divisions. Revenue from external foundry customers was $411 million in the quarter, and the division still reported an operating loss of $1.9 billion.
Still, Intel says manufacturing performance is improving. Tan said: “Intel Foundry execution continued to improve consistently. During the quarter, Intel 3 and Intel 18A yields both increased again, with Intel 18A improving at a double-digit rate. Wafer output on both nodes exceeded expectations.”
The company is also expanding its manufacturing footprint. Equipment installation is progressing in Ireland, while Intel 18A production is ramping up in Oregon and Arizona. It is adding capacity for advanced packaging in New Mexico and Malaysia, and continuing construction work in Ohio.
These investments are central to the strategy initiated under former CEO Pat Gelsinger and continued by Tan. They are also expensive and will take time to generate returns. Intel expects capital spending to rise significantly in 2027 as it invests in additional equipment and prepares its next-generation manufacturing processes.
Tan has repeatedly described the turnaround as a long-term project rather than a quick fix. “Looking to the future, I have always emphasized that rebuilding Intel is going to be multi-year journey. And I remain firmly committed to making it happen,” he said.
He noted that he had been in the role for only a year and a half and pointed to the restructuring already undertaken, including workforce reductions, the elimination of layers of middle management and the appointment of a largely new leadership team.
“We still have much more to do,” he said.
Ultimately, Intel’s latest report offers both reasons for concern and evidence that the company has opportunities to rebuild its business. The PC market is under pressure, manufacturing capacity remains constrained, and the foundry operation is still far from being a sustainably profitable business. At the same time, demand for server CPUs is growing rapidly, Intel’s manufacturing yields are improving, and the company is investing to expand its ability to serve both internal and external customers.
The sharp decline in the stock price reflects the risks facing Intel, but it may also reflect investors’ tendency to focus on the immediate disappointments rather than the longer-term opportunity. The AI infrastructure boom is creating a potentially enormous market for CPUs and advanced manufacturing. Intel has a chance to benefit from that growth, but it must demonstrate that it can deliver the products, capacity and financial returns needed to turn that opportunity into a durable recovery.
