SANTA CLARA, Calif. (
crushed analysts' earnings estimates last Thursday as the chipmaker reported higher-than-expected revenue. The stock, perversely and bafflingly, fell 3.2% the next day.
Analysts explained the share-price decline this way: Intel may have reached peak profitability, and the only way forward is down. Still, such a prospect in the infancy of an economic recovery after the deepest recession in eight decades is a difficult thesis to accept. (Fourth-quarter net income increased more than ninefold to $2.28 billion from a year earlier.)
The semiconductor industry is cyclical -- it follows the ups and downs of the economy -- and is correlated to the stock market. So the contention that Intel has reached its zenith in earnings would require investors to believe that the biggest semiconductor producer in the world is going to stagnate as the economy begins to grow again. That would also lead investors to think that the industry as a whole will decouple from the stock market, which is improbable.
Intel, which posted the highest sales in more than in a year in the fourth quarter, said the gross margin -- the portion of sales remaining after deducting the cost of production -- was a record 65%, though the margin will slip to about 61% this year. That outlook sparked concern of peak earnings, but it's likely the comments were designed to temper expectations given uncertainty about the strength of the global rebound. Raising expectations is easier than lowering them if 2010 doesn't pan out as the company hopes.
Another explanation about the stock slump is that the share price was actually affirmed by the earnings numbers. Intel had gained 13% from Dec. 17 to last Thursday's closing price (before the earnings announcement). Investors saw Intel's potential to blow out the quarter and bid up the price ahead of the earnings release.
Considering that the hot gifts of the holiday season were netbooks sporting Intel's tiny Atom processor, forward-thinking investors were wise to see the company's promise.
computers now run on Intel processors rather than the old
PowerPC processors from the first half of the decade, Intel is even shielded from the Mac versus PC death match.
Some may argue that if investors really anticipated these results, analysts estimates should have reflected the improved performance. That's a valid argument, but it can be easily explained away with something known as "anchoring bias." That's when analysts tend to overlook new information in favor of what they have previously known. After the horror show of earnings releases over the past year, analysts have been overly conservative for fear of being wrong.
The share price of Intel's main rival,
, has risen even faster over the previous month, nearly doubling, which gives further credence to the theory that investors began incorporating increasingly bullish sentiment to the semiconductor market.
Intel's share performance is likely the result of expected exceptional earnings rather than reservations about the future. Investors may be viewing Intel incorrectly, and you may not be able to change their mind, but the chipmaker's future does look bright, so simply holding the stock may be the best move for now.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.