Intel’s Q2 earnings and guidance significantly beat expectations, driven by AI demand for the fastest growth in 15 years

This article comes from SoSoValue Research

Intel releases 2026 Q2 results: revenue, adjusted EPS, and gross margin all significantly beat market expectations. The data center and AI business posted the fastest growth in its history, and the client business also came in better than expected. The company’s Q3 revenue guidance continues to substantially exceed the consensus, indicating that AI infrastructure buildout is once again pulling demand for server CPUs, custom chips, and wafer manufacturing.

The company also raised its 2026 capital expenditure guidance from $18 billion to more than $20 billion, and expects 2027 spending to increase significantly, providing support for the semiconductor equipment, cleanroom, advanced packaging, substrates, and storage industry chains.

However, Intel Foundry still recorded more than $2 billion in operating losses, and the share of revenue from external foundry services remains low; rapid capital expenditure expansion will continue to put pressure on cash flow. Intel’s stock price rose by about 13% in after-hours trading at one point, but the gain later narrowed to about 4%.

Q2 performance: revenue and profit margins comprehensively beat expectations, but cash flow remains dragged down by special projects

Q2 revenue was $16.13 billion, up 25.4% year over year, the fastest growth in 15 years. This was higher than the consensus expectation of about $14.4 billion, and also $1.8 billion above the midpoint of the company’s prior guidance.

Adjusted EPS was $0.42, close to market expectations of $0.22—about double. Adjusted gross margin was 41.8%, up 12.1 percentage points year over year, and 2.8 percentage points above the company’s guidance. Revenue growth, higher average selling prices, improved product mix, and better process yield collectively drove adjusted operating profit to $2.8 billion, compared with a loss of $0.5 billion in the same period last year.

GAAP net loss was $11.0 billion, EPS was -$2.16, mainly due to a $12.5 billion non-cash fair value loss related to the custodial shares associated with the U.S. Department of Commerce. Excluding related adjustments, the company achieved net profit of $2.2 billion.

Q2 operating cash flow reached $7.0 billion. Cash and short-term investments were about $30.0 billion. However, due to a net outflow of $12.2 billion in partner funding, adjusted free cash flow was -$8.4 billion. Since Q2’s own capital expenditures were $2.7 billion, the negative free cash flow more reflects partner funding arrangements; with further increases in manufacturing and back-end capacity investment in 2027, cash flow improvement may still be delayed.

Data center growth of 59%; client business beat expectations, but PC demand faces pressure

Revenue from data center and AI was $6.26 billion, up 59% year over year and up 24% quarter over quarter, significantly above market expectations of about $5.4 billion. Operating profit rose to $2.47 billion, and the operating margin improved from 16.1% in the prior-year quarter to 39.5%.

The growth was mainly driven by strong demand for server CPUs from hyperscale cloud vendors and enterprise customers. The custom chip business revenue is up nearly two times year over year; annualized revenue scale is currently close to $2.0 billion. Intel expects server CPU industry shipments to maintain strong double-digit growth in 2026 and 2027, with the growth momentum likely to continue into 2028.

Client and physical AI business revenue was $8.88 billion, up 13% year over year and above market expectations of about $8.0 billion. AI PC revenue increased 26% quarter over quarter and currently accounts for about two-thirds of client business revenue; edge computing contributes about 10%.

Client business growth was mainly driven by a higher mix of high-end products, higher average selling prices, and cost pass-through. Due to rising storage prices and supply constraints, the company expects global PC consumer volumes in 2026 to decline by a low double-digit percentage, and performance in the second half is also expected to be weaker than normal seasonal levels. Intel plans to shift more limited production capacity toward data center CPUs with stronger demand.

Foundry losses continue to narrow; external customers still need to deliver

Intel Foundry revenue was $5.77 billion, up 31% year over year. Operating losses narrowed from $3.17 billion in the prior-year quarter to $2.09 billion, and the loss rate decreased from 71.7% to 36.2%.

18A output grew more than 50% quarter over quarter, about 25% above the company’s target. Improvements in yield, production cycle time, and capacity utilization drove Panther Lake’s main product manufacturing costs down by about 50% during the year, and the company expects further reductions of about 20% by year-end.

18A-P has already entered risk production. The 14A PDK 0.9 plan is scheduled for delivery in October. Risk production is expected to begin in the second half of 2027, with mass production in 2028.

However, this quarter Foundry’s external revenue was only $293 million, about 5% of the segment’s revenue. Growth still mainly comes from Intel’s internal products. Management said feedback from external customers has been positive, but has not yet disclosed large mass-production orders that would validate the commercial attractiveness of 18A-P or 14A.

Earnings call: supply gaps persist; capital spending still needs order validation

Management said advanced-node logic chips, silicon wafers, storage, substrates, and advanced packaging are facing severe supply constraints, and shortages are expected to continue. Some bottlenecks may ease from late Q3 to Q4, providing additional upside for Q4 revenue growth, but the company expects it will still not be able to fully meet server CPU demand by year-end.

The increase in capital expenditures is based on long-term customer agreements and demand signals, but the company did not disclose how much of the incremental investment is tied to external Foundry customers, nor did it confirm that 14A or 18A-P have received formal mass-production orders from major customers.

Intel currently has about $40 billion in liquidity and holds about $10 billion in non-core assets available for disposal. Management also said that if future expansion demand exceeds the capacity supported by internal cash flows and customer prepayments, the company could enter capital market financing. Whether capital investment in 2027 can generate effective returns will depend on how long server demand lasts, how fast 18A costs decline, and how well external foundry orders are fulfilled.

Q3 guidance significantly beats expectations; 2027 capital expenditures continue to increase

Intel expects Q3 revenue of $15.8 billion to $16.8 billion, with a midpoint of $16.3 billion, up about 19% year over year, above the consensus expectation of about $15.1 billion. Adjusted EPS is expected to be $0.38, and adjusted gross margin is 42%.

Q3 gross margin is expected to be roughly in line with Q2. New products such as Panther Lake and Granite Rapids are still in the early stages of capacity ramp-up, and unit costs are above the company’s average level. As 18A yields and production continue to improve, new product costs are expected to gradually translate into gross margin support in 2027.

The company raised its 2026 capital expenditure guidance from $18 billion to more than $20 billion and expects 2027 capital expenditures to be significantly higher than 2026. Incremental investment will cover Intel 3, 18A, 18A-P, and 14A process nodes, advanced packaging and EMIB-T, cleanroom construction, as well as substrate and storage supply assurance.

This earnings report shows Intel is regaining growth opportunities brought by the AI infrastructure cycle. The ramp-up of server CPUs, custom chips, and 18A capacity is driving rapid improvement in revenue and profits, and the Q3 guidance also demonstrates that current demand remains strong.

After-hours gains narrowed from about 13% to about 4%, reflecting that the market has started adopting higher valuation benchmarks: short-term results exceeding expectations support the recovery narrative, and Foundry external revenue, advanced-node process customers, return on capital, and free cash flow will determine whether this recovery can further translate into sustainable valuation upside.