Intel Earnings a Hit, but No Time for High Tech To Relax

Last Updated Jul 14, 2010 9:49 PM EDT

Yesterday, Intel (INTC) crowed about its "best quarter ever," with revenue up 34 percent year over year. Many think that it's evidence that the recovery has legs, but high tech ought to be a lot more cautious. There's a significant amount of evidence that the rise owes more to inevitable spending than to true confidence or sustained new business growth in the computer industry.

That's a downer of an interpretation and out of the norm, I know, but consider some of the evidence. First, according to IDC, worldwide PC shipments were up 22.4 percent in the second quarter, compared to the year before. In the first quarter, shipments were up 24.2 percent, but that was compared to the year before where they shrank by almost 7 percent. A significant amount of "growth" is just recovering lost ground. Now, look at the key market drivers that according to IDC led to the improvement:

  • aging commercial installed base
  • proliferation of low-cost media-centric PCs
  • low PC penetration throughout much of the world
There's replacement purchasing and there's expansion of highly price sensitive markets, and it won't continue at this clip:
"The surge in consumer activity seen in the past two quarters has started to slow as expected, while commercial replacements continue to grow," said Bob O'Donnell, IDC Vice President for Clients and Displays. "We expect consumer activity to remain healthy, but gradually slow through the end of the year, while commercial market growth will be more stable, reflecting a planned replacement cycle over the next several years."
Next, 74 percent of work PCs still run Windows XP from Microsoft (MSFT). That figure alone attests both to how bad a product Windows Vista was and how little most businesses need to significantly upgrade their infrastructure. I've taken the half-empty view because there is no sudden rush to move to Windows 7, even though Microsoft has seen brisk business in the new operating system since last fall. However, few are pressed to make the jump, and that means far less pressure for new hardware. Make the old operating system run longer, and you can put off the major hardware purchases.

Finally, some analysts doubt the health of the overall chip sector by remaining cautious about Advanced Micro Devices (AMD) and Nvidia (NVDA). Morgan Stanley analyst Mark Lipacis noted that Intel's client segment had only 2 percent quarter-over-quarter growth, meaning weaker consumer spending. Nvidia, also dependent on consumer spending, has probably seen a deceleration in demand.

Being a little pessimistic may not make you popular among investors, but it's often a smart move when conducting business.


Image: Flickr user tech no logic, CC 2.0.
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.