Three Reasons Intel won't Grow Q2 of 2012
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Intel (NASDAQ: INTL) beat earning estimates handily last week, yet plummeted afterwards. What caused this? One would think the stock price would've risen. But there are three reasons investors brushed off higher earnings this quarter.
Slow sales growth.
Even though the stock beat earnings substantially, it had the smallest quarterly increase since 2009. Not just Intel, International Business Machines (NYSE: IBM) was also in the same boat. IBM’s revenue climbed by 0.3% to $27.7 billion while Intel’s grew 0.5% to $12.9 billion. Both companies, being in the tech industry, struggle with shrinking sales influenced by the European debt crisis while they transition resources into the emerging markets to make up revenue.
An example of Intel’s move is its smartphone positioning in India. While the company is known for being strong in the PC market, it is moving its chips into the Smartphone market throughout India; even if it is a little late. Partnering with Lava to launch Xolo X900, the first Smartphone with Intel inside will be available before the end of April for Rs 22,000. Lava has partnered with Croma, consumer electronics and durables retail chain to get the phones into consumer’s hands. Long term, this may bode well for Intel if they can move into the market. But—will Indian consumers buy a more expensive Smartphone just because “Intel” is inside it? Smartphones from multinational handset makers Samsung and Nokia are available at lower price points. They offer strong chip portfolios with processors at competitive prices.
Can Intel crack the competitive mobile phone and tablet market?
While we have already given an example of how it is moving into India, it already has alliances built in China to distribute Smartphones and tablets with its chips. Intel has been developing new chips, including mobile chip Medfield, that aim to offer better power savings and faster computing speeds. Medfield, which can be used in both tablets and Smartphones, is partnering with Lenovo and Motorola in China to release Smartphones with its chip inside.
Can Intel crack the highly competitive market though? This market is already dominated by ARM Holdings (NASDAQ: ARMH), the Cambridge, U.K. based competitor. Intel is devoting a large portion of its resource to this market, but competition is fierce and Intel is moving in the market late.
Second Quarter margins expected to fall.
Even though it beat earnings estimates, Intel's stock tumbled after it forecast a decline in gross margins. This news was taken as a disappointment by investors. What are gross margins? This is an accounting term that describes a company’s financial health by revealing the money that is left over from revenue after accounting for the cost of the goods sold. Okay, so Intel is going to have less money left over at the end of next quarter after all the costs are tallied up than expected. Why would this make investors reject the good news of earnings? The reduced profits may be a result of external markets beyond Intel’s control that will drive sales lower. Or—it could mean a higher cost in sales of a product bringing in less revenue. Either way the news is not good. Intel either will have reduced sales or the profit margin on its products is going down. This sent the stock down and may continue to move the stock in that direction throughout the quarter.
So these are three concerns investors and analysts have with Intel going into the second quarter of the year. We do not expect to see the stock move because of this and it may be the fourth quarter of the year that we see any rebound.
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