By Olga Kharif (Updated on Sept. 2)
For several years, Intel could do no wrong -- or so it seemed to investors. Most quarters, the PC processor king saw its sales soar, and it consistently beating earnings estimates by a penny or so. Result: The Street loved the stock, which was up some 90% in 2003.
Intel (INTC) has now discovered the perils of high expectations. Investors broke into a sweat when the chipmaker, having likely overestimated demand, recently saw inventories start to pile up. Throw in missteps such as multiple product delays, and, as one industry insider puts it, the outfit has "mud on its face."
TOO BLEAK? Intel's stock has dropped 33% since January, 2004 -- it was trading at $21.29 at the Aug. 31 close -- with some of the most dramatic price declines coming in the past few weeks. Most recently, investors have been spooked by the potential impact on Intel's Sept. 2 midquarter update, given that some observers suspect back-to-school demand for laptops has been weak.
Indeed, on Sept. 2, Intel knocked its estimated sales down from a range of $8.6 billion to $9.2 billion to a range of $8.3 billion to $8.6 billion. Worse, Intel also trimmed its margin expectations from 60% to about 58%. Not surprisingly, investors sent the stock down a further 7%, to $20, in after-hours trading.
The Street may overreacting somewhat, says Tai Nguyen, an analyst with Susquehanna Financial Group in San Francisco. Those revised sales-range figures are still at least 10% above last year's third-quarter numbers, but imply a slippage in EPS from the year-ago period's 33 cents.
Nguyen dismisses concerns about back-to-school sales, pointing out that they appear to be in line with the normal seasonal pattern, which sees students and their parents do most of their buying during and after the Labor Day weekend.
SWEET AND SOUR. He also notes that computer manufacturers were buying chips at a brisk rate in July and August. Plus, Intel's Aug. 22 price cut on processors should further rev up demand -- particularly since the chipmaker slashed prices more than its main rival, AMD (AMD), according to Brian Matas, an analyst with chip consultancy IC Insights in Scottsdale, Ariz.
Intel has had other good news, too: Its motherboards and flash-memory businesses have been seeing steady growth. And since the biggest market for Intel's flash products is cell phones, whose growing complexity and additional functions increasingly require more memory, the outlook for that part of the business remains relatively bright.
Not everything is rosy, of course. As lower-margin flash and motherboards contribute greater percentages of overall revenue, overall gross margins could come under pressure, says Nguyen. And flash revenue growth also might slow in the fourth quarter because of a large Siemens (SI) contract for advanced cell-phone chips Intel lost to AMD.
Much will depend on whether the economy warms up again in the fall. "Semiconductors are very, very economically sensitive," says Larry Eakin, who co-manages $3.5 billion at Armada funds (which owns Intel shares). "A tough economy can make the best management team look bad." But a stronger-than-expected final quarter and a little luck could put Intel back into investors' good graces again. Kharif is a reporter for BusinessWeek Online in Portland, Ore.