THE DAY AHEAD: Is Intel's future half empty or half full?

Larry Dignan
3 min read

Analysts can't agree Intel Corp.'s (Nasdaq: INTC) prospects and the company didn't do anything to settle the debate with its earnings. Is Intel's future half empty or half full?

When a company misses estimates, but is bullish on its upcoming quarters it normally indicates one of two things: Either the company is trying to cover its tail because it fumbled the latest quarter or the outlook is actually bright.

Given Intel's track record as a straight shooter, you can bet on the latter.

Intel's future: Half empty or half full?

The one sure thing is that investors are going to hear a lot of noise. Your best bet would be to tune out all the Intel talk and focus on the long-term.

Downgrades, upgrades and all sorts of adjustments to estimates are all possible today.

Sit tight. Intel shares usually slump in the first half and surge in the second.

Here's what you've got to go on. Intel missed estimates with second quarter earnings of 51 cents a share. Wall Street was expecting 53 cents a share. But Intel added that it expects to report a strong second half with revenue of $6.7 billion up slightly in the third quarter. As usual, Intel officials didn't elaborate much on how much stronger things would be.

The company does expect margin improvement as it cuts costs, makes manufacturing more efficient and offsets declining prices on the low-end of the market with high-end chips. Profit margins were 59 percent in the quarter and Intel increased its forecast to 60 percent for the year.

Intel also noted that it wasn't seeing any Year 2000 problems. The company even estimates that average selling prices will be relatively stable despite the "free PC" movement.

The big decision becomes whether you buy into Intel's story as a long-term play. The evidence supports Intel.

Exhibit 1: Intel has destroyed its competition in the low-end for now. Advanced Micro Devices (NYSE: AMD) will report a whopping loss today because it can't win back customers that it lost previously. AMD could challenge Intel on the high-end of the chip market, but we'll believe it when we see it. Meanwhile, Intel said it gained marketshare in the low-end. National Semiconductor (NYSE: AMD) bailed out on the PC chip market by selling Cyrix to Via Technologies.

The wild-card: Via Technologies may be more willing to enter brutal pricing battles with Intel.

Exhibit 2: Intel has shown it can adapt. The company has done a good job diversifying from PC chips with its acquisition of Level One Communications and Dialogic. The company has also done a good job cutting costs and becoming more efficient. Intel's non-PC chips and networking products can offset the PC chip price plunge.

The wild-card: Intel's low-end chips may be outselling the company's pricier Pentium III. If that's the case then Intel may not be able to adapt its way out of a price squeeze.

Exhibit 3: There's Windows 2000 on deck. When Microsoft Corp. (Nasdaq: MSFT) finally gets Windows 2000 to market that will lead to an upgrade cycle. Faster, more expensive Intel chips will be needed.

In any case, investors are going to see the arguments fly. Your best investment may be a pair of earplugs.

Motorola's Iridium poisoning

Motorola and strong performance on Wall Street are two items that haven't gone together. That's changing though. The company reported second quarter earnings of 44 cents a share to top estimates by three cents.

Revenue was up 7 percent year over year to $7.5 billion, but why complain. People will though. That revenue sum was on the low-end of expectations.

In addition, Motorola has Iridium (Nasdaq: IRID) poisoning.

Because of Iridium's numerous financial problems, Motorola, which owns 18 percent of Iridium, may face huge losses and a hefty third quarter charge.

Iridium is that satellite venture built on the idea that folks want to use expensive satellite phones that about the size of a small laptop. Calling from the Sahara is a nice perk, but hardly appeals to the masses.