has touted the strength of its forthcoming microprocessor line-up for months. And based on the company's financial forecast for 2006, its faith in the game-changing powers of its new chips appears to extend beyond its marketing copy.
While the 2006 revenue forecast that Intel delivered Wednesday is much lower than the company's original estimates, it does assume a major lift in the second half of the year when the new products hit the market.
In order to attain the roughly $37.6 billion that Intel expects to generate in 2006, the company needs to post third and fourth quarters with 13% to 15% sequential growth rates, according to some analysts.
Investors and analysts are split on how justified this optimism is on Intel's part, particularly given some of the company-specific and industry dynamics at play. But for most investors, the focus seems to be on Intel's future, rather than anything the company is doing in the first months of the year.
This would explain the stock's apparent immunity to the
mediocre first-quarter results, worse-than-expected guidance for the second quarter and customer inventory issues that Intel served the Street on Wednesday. Intel's stock was up in after-hours trading following the release of the results Wednesday, and gained about 0.6%, or 11 cents, at $19.67 in recent trading Thursday.
With Intel's stock down roughly 22% since the beginning of the year, and hovering around 52-week low levels much of that time, bad expectations for the first quarter were likely already baked into the stock price.
"Although there were many points in Intel's results that could give investors pause, we actually believe the majority of the market will view the release with a large degree of relief," wrote Stifel Nicolaus analyst Cody Acree in a note to investors maintaining his buy rating.
"Now that this 'shoe' has finally dropped and we have some definition as to the gross margin trough and the company's view of a significant recovery in the second half, we believe investors will be more comfortable and will begin rebuilding positions on the belief that a performance inflection is now in sight," said Acree, whose firm makes a market in Intel securities and has provided noninvestment banking services to Intel in the past 12 months.
Despite being the dominant PC microprocessor company, with over 80% of the world's market share, Intel has been losing share in recent months to rival
Advanced Micro Devices
. Many people consider AMD's processors, particularly its desktop and server processors, to be technologically superior and more power-efficient than Intel's current offerings.
In March, Intel warned the Street that first-quarter revenue would fall substantially below its initial projections, citing weak demand and slight market-share loss.
Intel acknowledged Wednesday that it had lost more market share to AMD in the third and fourth quarter of 2005 than it had previously believed. Intel contended, however, that it held the line in microprocessor unit market share during the first quarter -- a claim that some analysts questioned.
And CEO Paul Otellini told analysts in a conference call that Intel's share of the server market would stabilize and then pick up following the third-quarter release of its new Woodcrest processor. He described Intel's new desktop processor, Conroe, as the most significant processor release since the company unveiled the original Pentium chip in 1993.
"The fact is that when they preannounced several months ago and the stock didn't go down, that was sort of an indication that people were looking through these problems," says Fred Weiss of Atlantic Trust Stein Roe, which has a small position in Intel stock.
By contrast, investors
pummeled AMD's stock last week when the company reported a stellar first quarter, but offered cautious guidance.
While Weiss says he believes the new products will put Intel in good shape in 2007, he's not so sure about the aggressive 2006 timing that Intel has set for its comeback.
"The day they announce the availability of a product doesn't mean all problems are solved," said Weiss.
"It's not just announcing the product is available, it's got to get into volume production," says Weiss. Only with volume production will Intel realize volume revenue from the new chips. And the economies of scale that come with volume production will also lower the costs of goods sold, helping Intel's margins.
Intel says it has been building up its internal inventories in anticipation of the new product introduction. And as the company converts the majority of its chip fabrication to 65-nanometer, margins will see improvement.
Still, the company's assumption that it will boost sales between 13% and 15% in the last two quarters of 2006 is clearly aggressive. According to Stifel Nicolaus' Acree, the seasonal growth in those two quarters is typically more in the 7% to 9% range.
If Intel hits the midpoint of its second-quarter guidance, Needham & Co. analyst Charlie Glavin says Intel will need to grow 10% to 12% in the last two quarters of the year, something he says has happened only once in the last 25 years. (Needham makes a market in Intel shares.)
And he notes that this assumes Intel is able to dig itself out of a $450 million to $500 million inventory hole in the current quarter.
"What truly worries us is that Intel is assuming a very sharp snap-back in revenue, to 'normal seasonal patterns,' and at the same time, Intel was blaming 1Q06 weakness on the long-term trend of slowing PC growth," said Glavin.