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Intel Reduces Sales Guidance, Market Tanks - Who is Still Surprised? (INTC)

Posted on | November 12, 2008 Time: 11:36 pm |

Can you smell the fear out there? The past two days of market action have been tremendously weak, with major indexes at or below the previous lows from October. Trading volumes were notably weak today, as buyers simply refuse to step up to the table. We most certainly are living in an uncertain world, trying to assess a myriad of numbers, metrics, and scenarios.

We are now starting to see big companies come out with revised guidance for the fourth quarter, and across the board we’re seeing big reductions. But before we snap to sell, we need to put the numbers in perspective. Intel’s (INTC) updated sales guidance this afternoon is a perfect example. Intel now sees 4th quarter revenue between $8.7 and $9.3 billion, down 14% from the previous estimate of $10.5 billion. Capital spending will be cut, and gross margins will be squeezed.

And the surprise is…..?

That much of a reduction, less than a month removed from the 3rd quarter call, certainly sounds ominous. But it’s really not…not when you consider that the previous $10.5 billion estimate would have represented just a 2% drop in sales from 2007’s Q4. Now sit back for a moment and ask yourself if you think a mere 2% drop in sales in this year - 2008 - was really achievable. If Intel were to just see revenues drop 15% for the year, I would consider than both reasonable and reflected in the stock price, which is now down over 50% year-to-date.

Margin Note

Intel is now predicting gross margins of 55%, which would be lower than the 58% recorded in 2007’s 4th quarter. But that particular quarter was exceptional, above Intel’s estimates, and up over 600 basis points from 2006. Essentially they were peak margins, so erosion to the 50% level in the coming quarters could occur.

It’s Time to Stop Fearing the Fundamentals

But again I hammer the point home - who is still out there feeling surprised? Why were investors surprised when Cisco reported a steep decline in sales during October? Why is Intel still destined to be the impetus driving the market to a terrible open tomorrow? Why will it inevitably crush the Japanese and Asian markets overnight? This is a recession, folks, and with the S&P 500 down 42% in 2008, the stock market is pricing in a lot of weakness.

Parting Thoughts

I would personally continue to avoid semiconductor stocks, although I still like the valuation on NVIDIA. And I think Intel deserves criticism for keeping estimate so obviously rosy for so long. But if people are wondering whether a recession is baked into stock prices, it’s time to take the data we have and actually start looking at the fundamentals again.

disclosure: author does not hold positions in the companies mentioned.

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Read more on Intel at Wikinvest
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Category: Fundamental Analysis, Tech Earnings, Technology
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