A word of caution can be very risky these days.
In its quarterly update on Jan. 15, Intel reported that demand for PCs and other gadgets made with its chips remained robust despite the economy's wobbles. But CEO Paul Otellini, despite declaring that "We remain optimistic about 2008", was reasonable enough to allow that the drumbeat of worrisome economic news is hard to ignore entirely.
Investors issued a speedy verdict, slicing 14 percent off Intel's already battered stock price soon after the fourth-quarter report. The shares tumbled an additional 12 percent in early trading the following day.
Despite all reassurances to the contrary, Wall Street clearly fears that the chipmaker will be affected by the economic slowdown after all. Historically, semiconductor suppliers have been among the first technology companies to feel the heat during hard times. "The U.S. economy is clearly heading into the sewer," said Roger Kay, president of consultancy Endpoint Technologies Associates. "Intel is really at the wellhead, and everybody's downstream from there."
A little bit cautious
Bears latched onto the fact that Intel's guidance for 2008 was cautious, noting that a weaker-than-expected revenue tally for the fourth quarter--about US$100 million shy of the US$10.8 billion Street forecast--could be taken as a sign of softness in PC sales.
Not so, Intel says. While Otellini allows that he is concerned about the influx of worrying economic news, he said he's not seeing any troubling signs in Intel's particular business. "We continue to benefit from strong demand for our processors and chipsets," Otellini said during an earnings conference call.
Instead, management blamed excess supply for declines in the price of flash memory chips, a problem that chipmaker Samsung Electronics also pointed to in its quarterly report, released earlier in the day.
Flash memory was also framed as the main culprit behind Intel's cautious revenue guidance for the current quarter. The company says it now expects US$9.4 billion to US$10 billion in first-quarter sales, down as much as 7.6 percent from the fourth quarter.
Typically, Intel's revenue decline from the busy holiday quarter hovers closer to 7 percent. "We think it's right to be a little bit cautious," chief financial officer Stacy Smith said during the conference call. Yet Smith also stressed that in the fourth quarter, "we didn't see anything unusual in terms of [order] cancellations. Our inventory is lower than I'd like it to be".
Room for an upside?
And Otellini said that he expects PC sales, still the dominant engine in Intel's chip business, to grow at a low double-digit percentage in 2008, in line with most analyst forecasts.
Consultancy IC Insights, in fact, expects revenues from sales of electronics, from computers to TVs and automotive gadgets, to grow 6 percent in 2008, up from a 5 percent gain in 2007. "There's talk of an economic slowdown," says Brian Matas, an analyst with IC Insights. "But there are other parts of the world that may offset any decline in the United States."
Notably, flash memory prices will soon pose less of a risk to Intel's results, as the company is set to spin off a chunk of that business in the coming weeks. As a result of that and manufacturing efficiencies, Intel's gross profit margins will continue to grow this year after surpassing analysts' estimates in the fourth quarter.
That said, Cody Acree, an analyst with Stifel Nicolaus, said he may lower his revenue forecast for Intel. "If Paul is correct, they may have room for an upside [in the first quarter]," he said. But, like other investors, he is not sure that Otellini is right this time. With market bears on a rampage, he'd rather be safe than sorry.
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