Intel (INTC) has been, as it’s now trending to quote, “a sick man” of AI adoption. But it seems it still has a good chance to catch up. The company's revenue is down 15% annually, but it beat expectations in its recent earnings report. Intel's stock has rallied about 40% so far, but further gains may be difficult unless it undertakes a real breakthrough – sooner rather than later.

Using state-of-the-art AI models often requires installing powerful AI accelerators in cloud data centers. The memory and computational requirements are enormous. The market for such AI accelerators is growing rapidly, and there are many opportunities for Intel (INTC) to capitalize on this growth. Gaudi's special AI chips have attracted a lot of interest, in some cases able to outperform Nvidia's market-leading GPUs. Intel also sells data center GPUs that can accelerate a wider range of workloads.

But Intel CEO Pat Gelsinger doesn't think AI will stay in the data center. The company is building AI into everything, and Intel's long-term AI opportunity goes far beyond AI accelerators. Unfortunately, Intel has over $3 billion in cost reductions unraveling, including those earmarked for layoffs and leaning out segment spend. As we look ahead, more Intel weakness is expected, but it looks like the worst is behind the company.

Q3 numbers are expected to show some stabilization. In particular, Intel Corporation has now guided for revenue of $12.9 to $13.9 billion, on 43% adjusted margins. These margins are getting better, after chronic underperformance in the last few quarters. The company is now targeting EPS of $0.20 adjusted. Over the last few quarters Intel “burned” billions of dollars in free cash flow. That is one of the biggest negatives for the quarter. The company did burn another $2.8 billion in cash. Cash flow should be top of mind for investors over the next few quarters.