Just how ugly is it going to get for Intel? While some suggest it could be just a temporary slackening in European demand, others say the party's over for the world's biggest chip maker.
Intel Thursday pre-released expectations for its third quarter, to be reported on October 17th, citing weaker-than-anticipated demand in Europe for lower-than-expected sequential sales and profits ahead. Shares were down 24 percent to 46.75 Friday morning.
Analysts explained that Intel once again had been surprised by the market -- after suffering from capacity constraints for several quarters, the company was finally in a position to increase output in the third quarter. Intel shifted its mix to mostly processors and in turn outsourced most of its chipset business to Taiwanese chipset manufacturers. But the move came at the wrong time -- just as the European PC market weakened and personal computers got pricey due to the weaker Euro.
While some a European rebound is inevitable -- most likely by the fourth quarter -- that doesn't mean Intel has clear skies ahead. This is the fifth quarter in a row the company has miscalculated market demand, and some analysts are getting fed up.
Firms that came down hard on the stock include CIBC World Markets, which cut it to "hold from "buy;" Chase H&Q, which cut it to "market perform" from "strong buy;" Goldman Sachs, which took the stock off its recommended list and lowered it to "market outperformer;" Salomon Smith Barney which dropped it to "outperform" from "buy" and Erika Klauer of Deutsche Banc Alex Brown, who lowered her rating to "underperform," a sharp decline from "strong buy."
More forgiving analysts included Merrill Lynch, which cut its price target on the stock to $70, and reiterated a "near-term accumulate/long-term buy" rating on the stock. PaineWebber also reiterated its rating -- "attractive" -- and shaved Intel's price target to $70 from $85. Lehman Brothers reiterated a "buy" rating, and cut its price target to $65 from $85. U.S. Bancorp Piper Jaffray also kept a "buy" rating on the stock. Most bullish of all, CS First Boston reiterated a "strong buy."
"We believe that the time to reduce exposure to Intel shares has come earlier than expected," stated DB Alex Brown's Klauer, who and sliced her price target to $40 from $88. That's a multiple appropriate given the revised expectation for a long-term growth rate in Intel earnings "only in the 10 to 15 percent range, at best," Klauer said in a report.
"Aside from Intel's operational missteps over the past several quarters, we have become increasingly less positive on the stock due to our concerns about the company's prospects for 2001 and 2002," Klauer said in the report. She said the downgrade was a result of the disappointing pre-release coupled with additional competition coming on line in late fourth quarter and 2001, the company's inability to deliver on new products and meet end-market demand, as well as the likelihood that gross margins are unsustainable.
DB ALex Brown lowered its earnings estimates for the third quarter from 41 cents a share on sales of $8.99 billion to 38 cents a share on sales of $8.63 billion. For 2000, earnings estimates were decreased from $1.73 a share on sales of $35.2 billion to $1.68 a share on sales of $34.16 billion. For 2001, estimates were lowered from $1.95 a share on sales of $49.3 billion to $1.73 a share on sales of $37.54 billion. The new 2002 earnings estimate is $2.00 a share, down from $2.35.
Though Klauer said she expects the European market will strengthen again, Deutsche Banc is less positive on the stock for three main reasons:
1. There is more competition coming on-line next year, which will impact Intel's market share and profitability. AMD's ramp up of its new facility in Dresden, Germany will put more pressure on Intel in the higher-end desktop market, which is one of its most profitable business segments. With this additional capacity from Dresden, AMD will be able to meet the strong demand expected in 2001, as well as take a greater chunk of the high-end microprocessor market. The mobile computing space will also be flooded by newer players.
2. As a result of missteps over the past year, Intel has not been able to keep up with industry growth rates, because of overall poor trends in average selling prices and losses in new businesses. Only a month ago, Intel announced that it was recalling its 1.13-GHz Pentium III processors. Intel has also suffered in terms of its chipset production (bugs again) and the Pentium IV is a year late.
3. Intel has yet to deliver results to show that the acquisitions it has made have been worth the hefty price tags. In its entry into the communications business, Intel acquired many similar network-companies, including Level One Communications, DSP and GIGA, which have resulted in less than meaningful acceleration in its earnings. Intel has also had trouble retaining key engineers in these acquisitions, which makes it more difficult to maintain strong new product momentum.
David Wong, analyst at PaineWebber was much more forgiving; he maintained an "attractive" rating on the stock, and only lowered his price target to $70 from $85. PaineWebber had been expecting revenue growth for the third quarter to be 8 percent, still a significant disappointment.
"Although we are disappointed that sequential revenue growth in the September quarter is less than we had expected, we note that the year-over-year revenue growth implied by Intel's revised guidance is 17 percent, which is still a good number for PC-related markets," Wong stated in a report.
"Intel stated that the reason for the revenue shortfall is weaker demand in Europe, specifically in corporate IT spending. We believe that the weak European currency may also have been a factor, having an impact on both revenues and gross margin. Intel said that sales in the North America and Asia/Pacific markets (were) as expected," Wong wrote.
While Intel did not provide guidance for the December 2000 quarter and beyond, the firm has lowered fiscal 2000 revenue estimate from $35.3 billion to $34.3 billion, and its 2000 earnings estimate from $1.72 to $1.64.
Other analyst actions Friday included cuts for competitor Advanced Micro Devices (NYSE: AMD) which was cut to "market performance" from "strong buy" at Chase H&Q, and to "market perform" from "buy" at Deutsche Banc AB. Micron Technology Inc. (NYSE: MU) was also dropped to "outperform" from "buy" at Salomon Smith Barney.
Companies expected to fall in sympathy include chip makers Cypress Semiconductor Corp. (NYSE: CY) and National Semiconductor Corp. (NYSE: NSM).
Bellwether techs across the board were depressed by the news, judging by movements on the Island ECN ahead of Friday's opening bell. Dell Computer Corp. (Nasdaq: DELL) lost 13 percent, or 4.94 to 33, Microsoft Corp. (Nasdaq: MSFT) shed 5 percent, or 3.32 to 60.87 and Cisco Systems (Nasdaq: CSCO) dropped 4 percent, or 2.46 to 58.56.