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.
But beyond the capacity issues, demand for products using Intel's chips appears robust. Notebook computers continue to remain hot items, and blade servers still account for more spending by corporations. Further, Intel is believed to have been focusing less on low-end chipsets in favor of the higher-margin segments of the market. Intel also is pushing its chips further along the evolutionary curve. It's ahead of schedule on using smaller transistor wires than it -- or its competition -- currently uses, which should yield cost and efficiency gains. And the company has multiple projects under way to build its chips with
multiple processing cores. For the current quarter, Intel last said it expects sales between $9.6 billion and $10.2 billion and gross margins of 60%. The midpoint of that top-line target -- $9.9 billion -- would mark a 15% increase from the same quarter last year and a 5.7% rise from the second quarter. Intel typically garners sequential growth in the third quarter closer to 7%. Most analysts see little chance that Intel will be able to exceed the high end of those predictions in light of capacity constraints. Current consensus estimates project sales of $9.92 billion and earnings of 36 cents a share, according to Thomson First Call. While company executives will limit their comments on Thursday to the current quarter, which ends later this month, investors are beginning to focus on the fourth quarter, which is usually Intel's strongest. If Intel can give some assurance that it has been able to build some inventory and can meet any sort of expected boost in medium-term demand, investors would likely move back into the stock. However, it took investors a year to return shares above the $25 level, so any minor disappointment -- or uncertainty -- likely will result in continued sideways movement until actual third-quarter results are announced in October. Nonetheless, that's a long few weeks for investors.