Intel Grooms Its Supply Side

With supply concerns sinking Intel's(INTC) stock to a three-month low, the chipmaker's progress in meeting customer demand will be a key issue during its midquarter update Thursday afternoon.

During the company's most recent quarterly earnings report in mid-July, CFO Andy Bryant said Intel's factories were running completely full and that it was missing out on revenue opportunities because it couldn't make enough chips.

This prevented the company from boosting its gross margin target for the back half of the year, typically Intel's strongest period. Investors saw this as an indication that the best of times had come and gone; the stock subsequently dropped from a one-year high of $28.71 to its current level of $25.66.

And indications are that issues of supply and demand haven't abated. In the six weeks since Intel reported results, Dell(DELL), Hewlett-Packard(HPQ) and Gateway(GTW) all have cited difficulties in getting parts they have needed.

Dell, which gets all of its computer chips from Intel, said during an earnings call on Aug. 11 that "tightness will continue through the third quarter." And as recently as Wednesday, H-P CFO Bob Wayman said there is a "little tightness in desktop microprocessors from Intel, but we believe it is manageable."

Intel said in July that its primary constraints concern chipsets, which are groups of semiconductors that surround a microprocessor in order to help it interact with other devices. Chipsets make up only about 10% of Intel's revenue, but Intel also has said it was tight on its primary microprocessors and flash memory.

This isn't a situation that gets fixed overnight. Intel boosted its capital expenditure budget for the second time this year in July and announced plans last month for a new factory in Arizona, but that facility won't start producing chips until the second half of 2007.