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Intel's Hidden Bad News

Given the strongly positive reaction to the Intel (INTC) earnings report late last week, you might ask, "What could be bad about that?" The numbers seemed good, but the press, as happens too often when the topic is technology business, became a pack of cheerleaders and missed some of the nuances that show how Intel is going to have an interesting time of it going forward. That's because its results showed that some fundamental shifts in how people use technology are going to continue hammering price points, margins, and earnings in the long run.

It would have been hard to miss such summations of Intel's earnings as "stellar results" (Reuters), another sign that a lasting recovery for the recession-battered personal computer market is under way" (AP), and "revitalized PC market lifts Intel" (New York Times). And yet with all that good news, "investors were restrained in their enthusiasm," as the AP noted.

Could it be that the investors understand that much less than the press? Or is it likely that the press really doesn't get what's going on in the dynamics of the semiconductor industry and in high tech more generally? My bet is on the latter. Let's go through some of the reasoning:

  • So what if Intel blew through analyst estimates? It's just part of the earnings gaming that most high tech companies pull off. If they're offering guidance and still surprising the analysts, then one of two things is going on. Either the guidance is rigged to look worse than the company thinks it's going to do or management is so inept that it can't figure out how to estimate sales and earnings. I say it's rigged. Why do analysts keep falling for it? Maybe because when you work for a company that sells shares and you can announce a phenomenal quarter, you can be sure on selling more shares and getting the commissions that have to fund your salary.
  • Remember that comparing 2009 with 2008 is like comparing standing on blisteringly hot asphalt in the summer and on glowing coals. The conditions are better in context, but still not all that great. Last quarter was up 28 percent in revenue over 2008? It's like running a race where your opponent's legs are tied together.
  • Look at the whole year and you see revenue down by 7 percent and operating income down by 6 percent.
The really big red flag, though, is to be found in the divisional breakout:
2009 vs. 2008 by Division
Division % Change
PC Client Group - 2%
Data Center Group - 21%
Other Intel Architecture - 21%
Intel Atom 167%
Intel's big growth is in the smallest chips, and given that they're significantly cheaper than the other lines, it means the volume is heavily shifting toward tiny to the least powerful chips running netbooks. The result isn't surprising giving what types of PCs saw the biggest unit sales boost in the same quarter. And even with all that spending on units, retail electronics store sales were down. Also, what we're likely seeing is the short-term explosion of pent-up demand. However, dynamics in the market are clearly changing, and the hope that the market will return to normal is in vain.

Image via stock.xchng user eskim0j0, site standard license.

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