moneydaily.com.
Wednesday, October 15, 1997 7:25 p.m.
More to come: There's a trend behind Intel's
disappointing earnings
by Michael Brush
When Intel hurts the markets feel it. But were
investors overreacting Wednesday when they sold off
many tech stocks after Intel issued an earnings-
estimates shortfall and warnings about its fourth
quarter? Or is the Intel news a sign of harder times
ahead for the tech sector?
A little bit of both. Many tech stocks had run up
considerably on jubilant third quarter earnings
expectations, and investors were looking for any
excuse to take a profit. Intel's missed earnings,
along with some news that the economy may be heating
up, provided that opportunity.
On the other hand, Intel's problems go beyond the
earnings air pocket that comes with any product
transition, in this case to its next generation
Pentium II chip.
Sure, the product transition can be used to explain
away weaker earnings for the next two quarters, but
Intel's difficulties go deeper, many analysts say. At
the center of the concerns about the future of Intel
-- and many other segments of the technology arena --
is that low-priced personal computer you've been
hearing so much about.
Why? People like 'em. Since the start of the year,
sales of PCs under $1,500 have been moving up sharply,
while sales of high-end computers over $2,500 have
been coming down.
But to bring PC prices down to the low levels that
have been making them sell, computer producers have to
watch the costs of what they put inside. And that
spells trouble for Intel, not to mention the makers of
things like disk drives, graphics chips and other
components used in PCs.
"We are looking at a different model for the PC
sector," says Drew Peck, a semiconductor analyst with
Cowen, a brokerage. "The gap in performance between
the low-price and high-price personal computers is
almost inconsequential. So, clearly, fewer people will
spend $2,500 for a PC. That is at the root of all the
issues in the tech sector. We will see higher revenue
with lower margins."
Sure, Pentium II chips will be in the cheaper
computers. But to get them there, Intel will have to
accept less money for them, cutting into margins. Chip
makers aren't the only ones who will suffer at the
hands of the PC priced for the masses. Disk drive
prices are already falling, as are the prices of
graphics chips and network interface cards.
"There are a lot of concerns about how the low end of
the market is heating up and taking business from the
high end," agrees Howard Schachter, a portfolio
manager at the Needham Growth fund. "What is spooking
people is the trend toward lower margins and low cost
PCs."
But not all parts of the tech sector will be hurt by
the brisk sales of cheaper PCs, of course. Software
makers should benefit. Also gaining will be producers
of analog components, or integrated circuits not used
in computers -- like the products used in cell phones,
remote controls and microwave ovens. "The demand for
analog is very robust," says Peck.
Not all analysts believe the cheaper PC will have such
a big impact on the makers of components that go into
PCs. Things like video conferencing and advanced
graphics software will support strong demand for more
expensive machines, they say.
But paradigm shift or no, Intel will be turning in
lower earnings growth for the next few quarters,
according to industry watchers. By the close of
business Wednesday, analysts had revised their 1998
estimates down to $4.27 from $4.69 a share, according
to First Call. The 1997 estimates were taken down to
$3.80 from $3.99. The new averages are based only on
the revised earnings numbers -- they exclude estimates
that were not revised. For 1997, 25 out of a total of
32 analysts covering the company had revised
estimates, and for 1998 24 analysts had reported a
change. The changes at Intel were so significant, the
previous earnings estimates are no longer valid,
according to First Call, even if the analysts have not
yet formally registered a change. |
