forbes.com
Intel's latest fable: Rising stock doesn't tell the whole story
By Om Malik
Intel Corp.'s (INTC) ability to turn the tide
on the stock market is a foregone
conclusion. In one stroke the world's largest
chipmaker has undone the damage wreaked by
the global economic crisis and the troubles within
the White House.
After two days of gut-wrenching declines, the
stock market turned positive when Intel
announced that it would have a
better-than-expected third quarter--a move that
was followed by widespread ratings upgrades by
the analyst community. Revenues are now
expected to be up 8%-10% sequentially, rather
than the previous predictions of being flat to up
slightly.
Not surprisingly, Intel's stock rose to $82.75, up
3 5/8 or 4.5%, by 11:30 today. The sentiment on
Wall Street is that all is well in the PC-world.
Marginal gains in both disk-drive and
memory-chip stocks seem to indicate just that.
Does that mean it's time to crack open that bottle
of bubbly?
Well put those glasses away, for Intel's troubles
are not over yet. For the past twelve months Intel
has been losing market share to lesser
chipmakers. Advanced Micro Devices (AMD)
and National Semiconductor's Cyrix division both
benefited from the consumer's decision to buy
sub-$1,000 personal computers, instead of
spending thousands on muscle machines.
This trend has played havoc on Intel's margins
and average selling prices (ASP), and some
analysts believe that the ASPs will continue to
decline. (Click here to read more about Intel and
how sub-$1,000 PCs knocked the wind out of
the company's sails.)
Wall Street, however, is focusing on the positive,
and is choosing to ignore why third-quarter
revenues and earnings will be higher than
expected. During the second quarter, indirect
corporate PC suppliers, such as Compaq and
Hewlett-Packard, worked hard to clear their
channels and inventories--while on the retail end,
consumers postponed their purchases until late
June to coincide with the launch of the new
Windows 98 operating system.
As a result PC OEMs, with the exception of Dell
Computer (DELL), postponed their
microprocessor buying into the third quarter. This
"back-to-school demand" resulted in strong
orders for Intel.
Intel has cut its workforce to cut expenses,
postponed plans for new fabs--leading to lesser
expenses. The result: Expect Intel's gross margins
to improve sequentially in the third quarter, but
that is only because the company, in the second
quarter, took a 2% inventory writedown,
reducing the cost of beginning Q3 inventory and
ultimately lowering the cost of goods sold for the
quarter.
The new direction of the company is
three-pronged: better revenues (up 8%-10%
sequentially, rather than, say, 0%-2%), higher
operating expenses (up 7%-8% sequentially,
rather than 3%-5%), and slightly higher
interest/other income. The direction for all
remaining line items (gross margin, depreciation,
tax rate, and capital spending) remains the same.
It is a tad tough to stomach the fact that the gross
margin expectation is the same as before, given
8% or so more revenues. We will have to wait
and see what's going on with the company.
Going forward things are going to get murky
again, predicts C. B. Lee, analyst at San
Francisco-based brokerage, Sutro & Co., who is
not convinced about the Intel recovery but still
maintains a "buy" rating on the stock. "Intel has
taken the right steps to address the issues of
low-cost PCs and declining ASPs, but where the
recovery is sustainable--the jury is still out on
that," he says.
There is more to Intel than what meets the eye.
For example, Intel is not immune from the global
economic crisis, which has knocked the wind out
of high-growth markets such as Asia-Pacific and
Latin America.
Framingham, Mass.-based market research
group International Data Group (IDC) estimates
that PC shipments will grow 11% this year. It is
quite clear that Intel is getting a bump from the
very anemic 2Q98, on some combination of
seasonality and end of channel inventory drag.
Even in high-growth markets like Western Europe
(expected unit growth of 16% this quarter), sales
are being driven by heightened interest in the
Internet and the focus is on low-cost PCs.
At the same time, Intel's main low-cost rival,
Advanced Micro Devices (AMD) is looking to
boost its sales from 2.7 million chips to 3.6 million
chips by the end of the fourth quarter. The
company is in talks with major PC-makers to get
its chips into corporate PCs, long the preserve of
Intel.
"By the fourth quarter, Intel will be back in bit of
a soup," says Fred Hickey, editor of the
newsletter Hi-Tech Strategist. J. P. Morgan
Securities analyst Terry Ragsdale concurs and is
still sticking with his cautious longer-term thesis
and therefore maintains a "Market Performer"
rating on the stock.
Given the current runup in the stock, Ragsdale, in
his most recent note, points out that Intel has
dramatically outperformed broader market
indexes and the semiconductor sector since he
started coverage with a cautious stance in April.
"Intel has already gotten the benefit of its liquidity
and importance in the various market indices, and
other semiconductor stocks are more likely to
outperform once the global macro economic
situation improves and the sector goes into a true
recovery," he writes.
You would never know this if you were watching
the hectic market reaction to such positive news. |
