Intel falls 12% after 3rd quarter earnings show server segment unexpectedly shrinks

• Intel fell 12% on Friday after it reported third quarter earnings on Thursday that revealed an unexpected drop in its data center segment.
• The segment had posted strong growth in the first half of 2020, but capacity digestion led to a significant decline in the third quarter, and Intel guided for a continued decline in the fourth quarter.
• Intel's third quarter revenue beat estimates, its profit met expectations, and it raised its full-year guidance. But that wasn't enough to stem the decline in shares.
• "We reiterate our Sell rating based on ongoing concerns regarding the company's long-term competitive position in CPUs and margin profile that we expect will weigh on forward earnings expectations and the stock's multiple," Goldman Sachs said in a note on Friday.
• Visit Business Insider's homepage for more stories.

The COVID-19 pandemic had a mixed impact on Intel's third quarter earnings, which beat revenue estimates and included a raised full-year guidance outlook.

But while the pandemic helped boost Intel's PC business by 1% thanks to a surge in consumer demand for laptops and desktops, its data center group posted an unexpected revenue decline of 7% in the quarter.

That's after the data segment posted considerable growth of more than 40% in the first half of 2020. According to Goldman Sachs, Intel is entering a period of capacity digestion and will see a continued decline in the segment in the fourth quarter.

The fall in Intel's data service business was most impacted by its Enterprise & Government unit, which recorded a decline of 47%.

Intel dropped 12% in Friday trades as investors took in the earnings report.

Here are the key numbers:

Revenue: $18.3 billion, versus the $18.26 billion estimate
Adjusted EPS: $1.11, in line with analyst estimates

Read more: Don't put too much energy into predicting the result -- 5 key tips for clients from strategists at JPMorgan's $1.9 trillion asset management arm with less than two weeks to go to the election

For the year, Intel expects to record revenue of $75.3 billion, better than its prior guidance of $75 billion. The company raised its full-year earnings-per-share guidance to $4.90 from $4.85.

But Intel expects continued weakness in its data service unit going into the fourth quarter. The company guided for a fourth quarter decline of 25% in the segment.

"We reiterate our Sell rating on INTC as 1) we believe that tactically the correction in DCG is likely to weigh on the earnings outlook and multiple in the near term, and 2) we have ongoing concerns regarding the company's long-term competitive position in CPUs and margin profile," Goldman Sachs said in a note on Friday.

Goldman's $46 price target on Intel represents potential downside of 15% from Thursday's close.