If nothing else, things probably didn't get any worse for Intel Corp. (Nasdaq: INTC) in the second quarter.
Judging by the slight dip in the company's share price, Intel investors have been a little nervous yesterday and today ahead of the chip giant's quarterly report. The world's largest maker of PC processors already cautioned observers to expect sequentially flat revenues, which should mean sales somewhere between $6.6 billion and $7 billion for the quarter. That revenue target translates into a consensus earnings estimate of 53 cents, according to First Call's survey of 31 analysts.
$7 billion in a season usually known for being the company's weakest of the year. Most companies would do anything short of starting Armageddon for that kind of "flat" performance.
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Unfortunately for Intel, the company is measured against its own history, and lately, the comparison hasn't been kind. Go back as far as the first quarter of 1997, and you'll find Intel earned more per-share then than it does now. Most of that isn't Intel's fault -- chalk it up to a combination of falling PC prices and increased competition, mainly from Advanced Micro Devices Inc. (NYSE: AMD) -- but it does explain why some analysts, like CIBC Oppenheimer's Ken Pearlman, have "hold" ratings on what is arguably the single most important non-software company in the information technology industry.
"The PC segment is just not as interesting as other segments," Pearlman says. "There's not much interesting happening here and hasn't been for awhile."
A few analysts recently joined the minority -- it's very much a minority, considering that 30 of 38 analysts surveyed by Zack's Investment Research recommend Intel as some sort of buy -- largely on continued concerns about the cheap PC trend, and delays in introducing 0.18 micron technology for Pentium III chips.
Even with a slight delay, Intel could still ship the newer processors in time to be placed in PCs sold during the holiday season. "They still have a pretty good shot at having this P3 product ramp coincide with strong PC sales in the back half of the years," says analyst Kurt Lanzavecchia, with C.E. Unterberg Towbin, which has a "buy" rating on Intel.
In any case, delays in introducing 0.18 micron technology shouldn't be too surprising, since many of Intel's product transitions have taken longer than initially expected, Lanzavecchia notes. Also keep in mind that the initial benefits of shrinking widths between circuits are lower manufacturing costs, rather than higher megahertz speeds, although ultimately, the latter comes along as well.
None of that blunts the move toward cheaper PCs, which forces Intel and AMD to sell cheaper chips. But even AMD is trying to break that cycle with its highly touted Athlon chip, which at least on paper seems a little faster than anything available from Intel at the moment. So if nothing else, prices might actually stabilize on the low end.
Athlon does strike at middle range of buyers who ultimately feed the heart of Intel's business. "Look at it this way, AMD has absolutely nothing to lose," Pearlman says. "It's got to be to more to the detriment of Intel than AMD, no matter what happens."
Fahnestock & Co. analyst Dan Scovel notes that with two large plants now up to speed, AMD might actually have resolved its seemingly endless series of production problems. But even Scovel, who rates Intel a "hold", notes that Intel already is preparing to ship a 600 mhz chip without the 0.18 micron manufacturing, so Athlon's speed advantage might not be around for long. And Intel's huge manufacturing leverage allows it to ramp up production much faster than AMD, even with the latter's upgraded facilities.
Don't ignore Intel's high end business, which is the one segment of its revenue that continues to grow at a healthy clip. Unit volumes are much smaller, but the margins are much better -- to a large extent, sales of Xeon chips for servers has offset the price erosion at the low end. Intel should be able to keep that price balancing act going for at least the next two or three quarters, Pearlman says.
So was Intel's first half weak? Yes. Is the competition getting better? Sure.
But is it anything for Intel to worry about yet? Probably not.
The overall technology market was retreating today, with the Nasdaq Composite Index down 33.69 to 2756.75 as the market enters the final hours of regular trading. The S&P 500 had fallen 11.55 to 1387.55 and the Dow Jones Industrial Average had slid 74.72 to 11126.26. 22GO