It takes a certain frame of mind to view a quarter in which net income plunged 35%, as a comeback.
believers have gotten used to ugly year-over-year comparisons, and
Tuesday's third-quarter earnings report provided some long-awaited data points in which investors in the chipmaker could take heart.
The company actually beat Wall Street estimates on the top and bottom lines. And for the first time in several quarters, Intel offered guidance that wasn't below analyst expectations.
Those two facts alone were cause for celebration among the Intel faithful, who bid the stock up as much as 3.5% in early trading Wednesday. In midday trading, Intel shares were up 1.10%, or 23 cents, at $21.13.
During the postearnings conference call Tuesday, Intel's management served up further evidence of the company's resurgence, contending that Intel had retaken market share during the quarter (without actually quantifying the claim) and suggesting that prices were "firming" up, after a period of steep price declines.
For Intel bulls, the company hit all the right notes. "Intel began to materially demonstrate the effectiveness of its turnaround, which has now been many quarters in the making," said Stifel Nicolaus analyst Cody Acree in a note to investors reiterating his buy rating on the stock.
"The September quarter appears to mark the trough in gross margin, much as the June quarter marked the trough in revenue," said Acree. "From here INTC should begin to benefit from its stronger product line, a steadily improving gross margin and aggressive reduction of expenses." (Stifel Nicolaus makes a market in Intel securities and has provided the company with noninvestment banking services in the past 12 months.)
With competition from rival
Advanced Micro Devices
fiercer than ever, Intel has spent most of the year getting itself back into fighting shape.
Intel is implementing a massive restructuring plan that will trim the company's staff numbers by 10% and has rolled out a variety of new microprocessors with impressive performance and power-consumption characteristics.
Intel management pointed to server processors as the star of the quarter, with unit shipments and average selling prices all up, thanks in large part to the popularity of the new Woodcrest processor.
During the third quarter, Intel said it earned $1.3 billion, or 22 cents a share, on sales of $8.7 billion.
Although Intel's gross margin level was down nearly 10 percentage points year over year at 49%, Wall Street analysts credited the belt-tightening and rising revenue from the popular new processors for Intel's EPS upside, which was 4 cents above expectations.
Of course, the upside comes from a bar that Intel set very low. And a close look at the numbers suggests that Intel may have stopped its downward slide, but it is hardly outperforming the market.
AG Edwards analyst David Wong, who has a buy rating on Intel, said that about 1.5 cents of the EPS upside was owed to $230 million in gains from divestitures and investments.
And the third quarter's 9% sequential increase in revenue, while welcome, also comes during the seasonally strong part of the year and is in comparison to a weak second quarter.
"To me, if there was any true growth, you'd have a much bigger number on the top line than what you got," says Pat Adams, the chief investment officer of Choice Funds, who shorted the stock after the earnings announcement.
"Has the patient stabilized? Yeah. But you're still in critical condition," says Adams.
The story is the same with guidance. Intel projected fourth-quarter guidance between $9.1 billion and $9.7 billion, bracketing the average analyst expectation of $9.4 billion in revenue.
The midpoint of Intel's fourth-quarter sales guidance implies 8% sequential growth, which CIBC World Markets analyst Allan Mishan said is about normal for that time of year.
"Given the recent run-up, we would characterize outlook as simply seasonal, even mildly disappointing," said Mishan, whose firm makes a market in Intel securities.
And the alarming inventory level, which increased 3% during the third quarter to $4.4 billion, continues to cast a cloud over the future.
Those looming concerns are enough to convince Mishan that Intel is fairly valued at its current multiple of 20 times 2007 earnings.
Some investors are already setting their sights on 2007, a time when they believe the next key round of the Intel vs. AMD battle will play out.
If Intel can tread water until then, that may just be good enough.