RealMoney Silver - Intel Makes Believers Out of Tech Cynics

Intel Makes Believers Out of Tech Cynics
By Alexei Oreskovic
TheStreet.com Senior Writer
4/16/2008 1:24 PM EDT

SAN FRANCISCO -- Intel's (INTC) message late Tuesday wasn't much different than three months ago: the company isn't feeling any ill effects from slowing economic conditions.

This time, though, investors actually believed it.

Instead of summarily dismissing Intel's claims and pounding the stock, as occurred in January, investors cheered Intel's optimism on Wednesday.

Shares of Intel were up 6%, or $1.26, at $22.17 in midday trading, a day after Intel delivered its first-quarter earnings report.

Of course, indications of global economic distress have only worsened in the past three months. So why the sudden trust in Intel's ability to ride it out?

For one thing, demand for Intel's microprocessors doesn't appear to have faltered, says Fred Weiss, of Atlantic Trust SteinRoe.

"People were all skeptical before. Now you've got one more quarter under your belt," says Weiss, who firm has a position in Intel.

Intel's strong revenue guidance for the second quarter -- and the fact that it stuck to its full-year gross margin target of 57% -- went a long way towards allaying fears of a slowdown in tech spending.

Intel's inventory, which declined 3% sequentially, also was reassuring.

The solid numbers added credibility to Intel's comments about its stability amid turbulent economic conditions. The chipmaker's wide exposure to markets outside the U.S., and the weak dollar, remain strong points.

More surprising were the healthy sales of high-end server chips in North America --ground zero of the subprime credit crisis. Financial firms may be cutting back on desktop and notebook PC purchases as they reduce headcount, Intel executives explained, but they're continuing to invest in server technology that can improve their core operations.

"If the economy takes another leg down it could hurt them," says Weiss. "But right now you have enough countervailing forces to keep them on plan."

Intel has also effectively pinned the blame for some of the weakness that it's experiencing on flash memory -- something the company failed to do three months ago.

At that time, explains one hedge fund manager, Intel disappointed investors by projecting a gross margin of 57% for 2008, after finishing the final quarter of 2007 with a 58% gross margin. The unexplained decline in profitability was surprising and led many investors to conclude that Intel's microprocessor margins were under fire.

As it turns out, the precipitous plunge in prices of NAND flash memory, a small side business of Intel's, was responsible for the margin contraction, as Intel eventually explained at a March briefing with financial analysts.

That's the key to the Street's change of attitude regarding Intel, says the hedge fund manager, speaking on condition of anonymity because he was trading the stock.

"This is not different than Q4, it's just that in Q4 Intel didn't do a good job of explaining that NAND flash was hurting."

Intel has already divested itself of its NOR flash business, by transferring its assets to Numonyx, a joint venture with ST Microelectronics (STM) . And Intel executives said Tuesday that they expected the NAND flash market to continue to be challenged throughout the year, but stressed that Intel was taking steps to limit the damage.

And with Intel benefiting from a major restructuring begun in 2006, and feeble competition from Advanced Micro Devices (AMD) on the microprocessor front, some investors believe the company is well poised to persevere through an economic slowdown.

Intel said Tuesday that its new line of Atom processors, designed to run low-cost notebooks in emerging markets, will help the company's financial results sooner than expected.

"I'm not convinced yet that the macroeconomic situation is so improved," says Daniel Gelbtuch of Roaring Brook Capital, which has an Intel position. "At the very least, Intel focused on the right markets."