Intel’s Warning Doesn’t Bode Well for the Sector
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After Mr. Draghi’s announcement last week, in which he promised a nearly limitless bond purchasing program by the ECB named Outright Monetary Transactions, the markets have been floating on cloud nine. It is uncanny how the market repeatedly manages to downplay or simply ignore the flashing macro-economic and corporate warning lights that have been going off all over the place. One of these is Intel’s (NASDAQ: INTC) recent revenue warning, which aside from being bad news for Intel, could mean the entire sector is at risk. As an industry bellwether, what’s good for chipmakers is generally good for tech stocks in general, and vice versa.
While Intel Corporation presumably needs little introduction, some basic information may be useful for those unfamiliar with the industry. With a market share of around 80%, Intel is the world’s leading manufacturer of microprocessors for PC’s and servers. Their only real competitor is AMD (NYSE: AMD), which has a substantially smaller market share and market cap. Besides PC’s and servers, Intel also manufactures chips for tablets, smartphones, cars and medical devices. Many of the devices you use now and have used in the past are probably powered by Intel technology.
Unfortunately, even giants like Intel stumble sometimes, and when they do, the consequences can be far reaching. Last Friday, Intel threw off a revenue warning which sent shares down over 3%. AMD was hit even harder, down over 5% on Friday. Intel cut its Q3 2012 sales forecast by about $300 million to $13.2 billion, which clearly caught the market unprepared. In reaction to the news, Microsoft (NASDAQ: MSFT) was also off about 1.5% on fears Windows 8 would not be the game changer many Microsoft bulls had hoped for. Intel pointed to the weak macro backdrop as the main culprit of the lowered outlook, as consumers have less money to spend on fancy gadgets, but analysts fear cannibalization of the PC market by tablets and smartphones may be a larger risk than the chip giant currently recognizes. Sales in China came in especially weak, fueling furthers fears of a slowdown in the world’s second largest economy.
In terms of fundamental valuation, Intel still looks quite attractive at the moment. The P/E stands at 10.3x earnings which puts the firm at a substantial discount compared to the industry average of 18.5x earnings. To compare, AMD has a P/E of -4x earnings. Intel has a very healthy operating margin of 32% compared to AMD’s 7%. Finally, LT Debt to Equity is at a very manageable 15.5%. So far so good. However, analysts expect Intel to face growing difficulty in the PC market. The main challenge for the company is thus to remain competitive in the mobile arena, which seems increasingly difficult, also due to increased competition from ARM , a growing player in the mobile chip market. ARM preceded Intel in reporting an expected slowdown in the 2nd half of 2012.
The big problem with Intel’s revenue warning is not merely its impact on Intel’s stock, but what it means for the industry and sector as a whole. If Intel is selling fewer chips, logic dictates that its clients are selling fewer devices, which reflects poorly on the state of the economy and especially consumer spending. HP’s (NYSE: HPQ) whopping Q3 loss of $8.9 billion dollars did little to ameliorate fears of a global tech slowdown. These results point to a possible industry-wide weakness in the PC market and to my mind investors should beware. Microsoft’s release of Windows 8 should provide more guidance as to the state of the PC market at the moment.
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