Paul and all,
There was also an accompanying article entitled, "Strategy Note," issued by Rob Chaplinsky of H&Q on May 30;
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This morning, Intel Corporation announced that June quarter results would fall short of consensus expectations. Management cited demand issues leading to an anticipated revenue shortfall for the period, indicating European demand as being especially weak. Naturally, this announcement has led to a dramatic sell-off of most all technology stocks and yet there appears to be a perverse irony in this reaction. After all, it was just last quarter when many members of various technology sectors were reporting disappointing results, particularly those firms that did substantial business with US corporations, while Intel seemed to sail along unscathed. This observation is particularly noteworthy in view of the challenging period experienced by various members of the personal computer industry, highlighted by the difficulties reported by the corporate reseller channel. The reason for this irony now? Many of the same reporting an improving demand environment. This is evident in the networking arena (Cisco, US Robotics, among others), among some PC OEMs (notably DELL), resellers and distributors (Tech Data and MicroAge). Similarly, the disk drive vendors enjoyed strong performance during the March period, only to report that supply and demand, which had favored the demand side, is now coming into balance. Likewise, the portable computer market is experiencing the same demand pattern, out of balance in the first quarter, but rapidly moving into balance in the second. All of this begs the question: is the Intel announcement a leading or lagging demand indicator?
Closer examination of the above disparate data points lead to the notion that perhaps the Intel announcement more strongly reflects its own very significant product transitions to MMX and Pention II technology rather than offers an indictment of overall demand across all of the technology landscape. Moreover, we believe that Intel may have a disproportionate exposure to the Asia-Pacific region. And this exposure aided the com pany when US corporate and consumer PC demand was a bit weaker, and could be hindering the company right now. More specifically, Intel is probably trying to manage its set of transitions by selling older technology to this region of the world, as well as Europe, and herein, mostly likely is the real culprit for the demand shortfalls for its older products. This point of view appears to be shared by some of the multimedia semiconductor vendors manufacturers (Oak Technology, Trident, S3, and others) whose products are incorporated into the PCs and motherboards of Asian manufacturers. Importantly, all of these PC multimedia semiconductor firms have already indicated the expectation for disappointing June performance.
So, once again, we have major product transitions hampering demand in the technology arena. Notably, though, the personal computer and related sectors appear to be among the last groups to correct this cycle, rather than suggesting a new round of broad-based demand issues. Once again, US corporate demand for technology products, and in particularly communications and information infrastructure products appears to be strengthening, not weakening. Investors, then, are strongly encouraged to use any derivative weakness to build positions in those companies with disproportionate exposure to the strengthening corporate environment. Promising sectors include networking, parts of telcommunications, software infrastructure, and front office automation--to name a few.
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