Intel Lowers Guidance, How Does this Read Across to Your Tech Stock?
Lee is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The award for the season’s most widely anticipated bit of guidance lowering goes to Intel Corp (NASDAQ: INTC). The semiconductor company duly obliged and I thought it would be interesting to look at the meaning of it and how it reads across the tech sector in general.
Intel Lowers Guidance
Intel lowered Q3 revenue expectations to $12.9-13.5 billion from a previous forecast of $13.8-14.8 billion. It works out to a 7.8% decline at the mid-point. Ordinarily we might have expected the market to give Intel a sharper markdown than the couple of points that it is down as I write. I discussed the potential for near term weakness in a previous article linked here.
Supply Chain Weakness
Furthermore, the color in the commentary was very revealing. Customers are reducing supply chain inventory rather than increasing it as they traditionally do in the quarter. Given Intel’s strength in the PC market, I think we can take it that the PC manufacturers are not ramping up production. This is a worrying sign for Microsoft (NASDAQ: MSFT), which has been hoping that the release of Windows 8 would lead to its usual sales pickup. In my opinion, Windows upgrades will gradually become less important in the future. If you asked an individual or a corporation whether they preferred to spend money on the Windows upgrade cycle or on a higher specification smartphone or tablet, I think I know what the answer would be.
Softness in the Enterprise PC Market
Intel also referred to weakness in the enterprise PC market. Dell (NASDAQ: DELL) and Hewlett-Packard (NYSE: HPQ) both reported desktop PC sales down 9%, with HP also reporting that notebook sales were down 10%. Naturally, both companies put a positive spin on the outlook for Windows 8 to spur future sales, but according to Intel the industry isn’t ramping up production in anticipation of gang-buster sales. Dell and HP’s rising inventory build-up is to be taken at face value. Falling sales are the problem, not a ramp up in production to meet demand. Given this scenario, I would expect some pricing weakness going forward as the PC manufacturers try to reduce inventory.
Slowing Emerging Market Demand
Intel also referred to slowing emerging market (EM) demand. This is something that investors need to factor in. It doesn’t mean that EM demand is ‘weak’ but what it does mean is that a lot of the assumptions baked in for EM end demand are likely to come in weaker than expected. A lot of companies have been chasing EM growth as a panacea for sluggish growth in domestic markets and I suspect that some of those that have been gearing up on EM will suffer disproportionately. China is slowing, and as it does so will Brazil and Russia with it due to lower expectations for commodity demand. Similarly, India has seen growth forecasts lowered throughout the year.
Capital Spending at the Low End of Range
Capital spending plans were also predicted to be at the low end of the forecasted $12.1-12.9 billion range; gross margins were expected to continue their decline.
The soft capex spending is not good news for the semiconductor capital machinery suppliers like Applied Materials or KLA-Tencor.
Data Centers Still Hot
The one bright spot was that the data center business is meeting expectations. When you look at the surging stock price of data center providers like Equinix ot Telecity, it is not hard to see why. It seems that all of the leading data center providers have been ramping up capacity this year in light of strong demand for broadband. The increasing usage of smartphones, tablets and other internet enabled mobile devices is leading to a surge in media rich traffic, which is dropping nicely into the top line of the data centers.
Intel isn’t alone because Cisco Systems (NASDAQ: CSCO) has also reported strong data center growth, with revenues rising from $259 million in Q1 to $415 million in Q4. Unfortunately, it only makes up 3.6% of total revenue for Cisco so it is not a game changer; but it does indicate continued strength in data center spending.
Where Next for Intel?
This statement is pretty much par for the course right now, but the semiconductor industry and investors need to be aware of the near term risks. Nevertheless, for long term investors a current PE of just over 10x and an EV/EBITDA ratio of around 5x doesn’t look expensive. The industry is cyclical, but that doesn’t mean the stock will never be a good value play. For more cautious investors I would suggest thinking about buying when we start to see some stability in gross margins. It usually is the key metric that guides the cyclical fortunes of the semiconductor industry.
SaintGermain has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Microsoft. Motley Fool newsletter services recommend Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.