A careful reading of the Intel news release indicates that sales are expected to drop 3 to 5%, while gross margins are expected to be down only slightly. This is not all that big a deal, in my view, given that it has already been acknowledged that some of the demand for personal computers is being replaced by growing demand for hand held, palm type computers or for cell phones capable of accessing email, Internet, and other data sources.
Intel has anticipated this shift in demand by acquiring technology more oriented toward data communications. Assuming the company knows what it's doing, and assuming other parts of its business continue strong (e.g., embedded flash memory), the anticipated drop in earnings is probably temporary.
The issue of whether higher oil prices will reduce consumer spending such that demand for personal computers and other equipment with Intel components will drop can be seen in two different scenarios. In the pessimistic scenario, consumers who depend on energy for heating and transportation and have no low cost substitute may certainly end up reducing their outlays for consumer durables, as long as these items are seen as only marginally useful. That is, maybe a consumer will continue using an old PC, rather than upgrading. On the other hand, the more optimistic scenario is that consumers begin substituting hand held or cell phone equipment for some of the applications formerly done only with a computer. In that scenario, if Intel has the components for the smaller equipment, it should continue growing its earnings. But that scenario also suggests that companies like QUALCOMM, directly involved in data communications appliances that are inherently smaller and lower cost than desktop or portable computers, could actually INCREASE earnings as a result of consumers holding back on the bigger items.
It has always seemed plausible to me that smaller, more convenient, and lower cost appliances for accessing the Internet and other data sources will have a much greater potential over the next several years than the older, larger, more expensive appliances. That's good for QCOM, but investors should not underestimate the ability of a well managed company like Intel to move successfully into this new area. That's why I think that the latest announcement from Intel does not indicate anything more than a temporary change in fortunes.
The other factor of some significance here is that, as Warren Buffett has noted many times, investors should never sell out good management. One buys stock in well managed companies with the idea that the stock can be held forever. Intel measures up to that standard in spades.
Art Bechhoefer |
