On the heels of a very tough year, mighty
has a very low bar to clear when it delivers its midquarter update after the bell Thursday.
"It's no secret that Intel is going to raise guidance," said the chief executive of a technology fund that holds semiconductor shares. "The question is how much they'll raise -- and frankly, given how negative the market has been on Intel, it won't take much to satisfy," he said.
At the moment, Intel, which does not give earnings guidance, is telling investors to expect fourth-quarter revenue ranging from $8.6 billion to $9.2 billion with gross margins of 56% "plus or minus a couple of points." And the consensus of analysts polled by Thomson First Call is for a pro forma profit of 28 cents on sales of $8.96 billion.
However, the current consensus is a bit below what Wall Street really expects. Citigroup Smith Barney analyst Glen Yeung, for example, now estimates that Intel will boost revenue guidance to a range of $8.9 billion to $9.2 billion, putting the midpoint at a bit over $9 billion, compared with the current midpoint of $8.9 billion. Similarly, Thomas Thornhill of UBS figures Intel will move the midpoint closer to $9 billion. (Neither Citigroup nor UBS has a current investment banking relationship with Intel.)
There have been a number of signs of late that PC sales have been a bit stronger than expected so far this quarter, and that, of course, would be a help to sales of Intel's flagship microprocessors. On Wednesday, hard-drive maker
sold more units to PC makers than it had expected.
In addition, Yeung noted that Taiwan-based
, which manufactures PCs for U.S. companies, has indicated that demand for the quarter is a bit higher than the company expected in September. Moreover,
guided above consensus for 2005, and Intel's archrival, chipmaker
Advanced Micro Devices
, now expects PC sales to grow by 10% next year, nearly twice as fast as some analysts were expecting.
However, there is less certainty about where Intel's margins are headed. Merrill Lynch analyst Joseph Osha called the 56% target "risky" and said he's sticking to his prediction of 55%. Even if Intel does hit 56%, Osha said investors need to pay careful attention to how it did it. "The company may manage to make up the difference with lower operating expenses or a lower tax rate, but we don't think that will impress investors," he said in a rather bearish note to clients.
"Investors may find the absence of additional bad news comforting, and we wouldn't be surprised to see the stock rally if Intel does manage to stick to its guidance," Osha said. "We think that investors would do better to focus on the prospects for margin expansion and earnings growth during the next 12 months." (Merrill Lynch is long Intel but does not have a current investment banking relationship with Intel.)
Intel's problems this year are
numerous and well documented: The company has missed product launch dates, canceled significant projects and generally executed so poorly that CEO Craig Barrett took the entire company to task in an angry email in late July. None of the missteps alone was disastrous. But taken together, the problems project the image of a stumbling, wounded giant, a far cry from Intel's former appearance of invincibility.
As a result of its own missteps and a general nervousness about the semiconductor sector as a whole, the stock has lost 28% of its value this year, despite a run-up in the last two months.
Interestingly, Advanced Micro Devices has appreciated by 42% in the same period.
To be sure, Intel's problems have more to do with what appears to be a cyclical slowdown in the sector and its own poor execution, than to competition. But AMD, which has transformed itself from a bumbling also-ran to a very credible competitor, has gotten heaps of favorable publicity, and some investors probably think it's about to knock Intel off the throne.
But that's not even close to the truth. According to just-released numbers from Framingham, Mass.-based International Data Corp., Intel's unit share of the microprocessor market in the third quarter was 81.2%, vs. 16% for AMD. And despite the impression that AMD has been grabbing share, IDC analyst Shane Rau points out that the company's share a year ago was actually higher -- 16.2%.
In fact, AMD's market share (in units) peaked at about 22% in early 2001, said Dean McCarron, principal analyst for Mercury Research in Cave Creek, Ariz. Still, Intel has felt compelled to respond to AMD, and that could explain some of the larger company's missteps, McCarron said. "Competition makes you move faster, but the risk is you can derail your own planning and execution," he said in an interview.
And looked at by revenue, the disparity between the two companies in the third quarter was even greater; Intel held a share of 88.2% of the $6.7 billion microprocessor market, while AMD owned just 9.9%, according to IDC.
No one forced Intel to shoot itself in the foot, and investors will be watching closely Thursday, hoping to see the giant chipmaker give some indication that it has learned from a series of painful mistakes.