Shares of computer processor manufacturer Intel (INTC: Charts, News) dropped on Friday after the Santa Clara, California-based company lowered its third quarter revenue outlook, expecting sluggish demand for PC products in the foreseeable future. Intel lowered its revenue outlook to $13.2 billion, down from its previous forecast between $13.8 billion to $14.8 billion. Intel cited “softness in the enterprise PC market segment” as well as a slowdown in emerging markets as the primary problems. Intel also withdrew its full-year forecasts, stating that it would provide updated forecasts during its third quarter earnings report on October 16. Earlier this month, Intel expected revenue to rise between 3% to 5%. With this refusal to reveal full year revenue forecasts, analysts fear that the company may actually post a year-on-year decrease in revenue for the full year. Gross margin guidance was also reduced, from 63% to a range between 61% and 63%.
Investors were stunned by the timing of the revised guidance. The third quarter has traditionally been a strong quarter for Intel, due to PC makers purchasing more processors in anticipation of the upcoming holiday shopping season. Macro concerns in all global markets, exacerbated by Apple’s (AAPL: Charts, News) disruption of the Wintel computing market, have caused major PC makers, such as Hewlett-Packard (HPQ: Charts, News) and Dell (DELL: Charts, News), to scale back on purchases.
Demand in emerging markets are also expected to be weak, due to the dominance of smartphones and tablets running on Apple’s iOS and Google’s Android operating systems. These mobile computing platforms traditionally use mobile processors from Intel’s mobile rivals – Arm Holdings (ARMH: Charts, News), Qualcomm (QCOM: Charts, News) and graphic chips giant Nvidia (NVDA: Charts, News).
Analysts had harsh words for Intel, whose stock has remained stagnant over the past five years. “It’s worse than everyone expected,” commented Evercore Partners analyst Patrick Wang. “Their consumer PC business is getting whacked.” MKM Partners analyst Daniel Berenbaum also predicted that the struggling PC market was unlikely to grow at all this year.
Berenbaum believes that Intel’s traditional customers may be scaling back their orders ahead of Microsoft’s (MSFT: Charts, News) Surface tablet, advertised as a true challenger to Apple’s seminal market-dominating iPad, which may further disrupt Intel’s traditional revenue stream from laptops and desktops. Microsoft is notably offering the Surface in two models – a cheaper one using an Arm processor, and a more expensive version with an Intel one. Analysts believe that if the cheaper Arm version is more popular, Microsoft may ditch its long-time partner Intel in favor of Arm’s cheaper, more mobile-friendly chips. Arm’s processors are generally considered to be more optimized for smartphones and tablets, due to their lower power usage. This would also be good news for Qualcomm and Nvidia.
Meanwhile, Google (GOOG: Charts, News) has thrown its hat into the ring with its Nexus 7 tablet, designed to challenge Amazon’s (AMZN: Charts, News) best-selling Kindle Fire tablet, which is currently the second-best selling tablet in America, trailing only the iPad and its variants. Amazon recently unveiled its next generation of Kindle tablets, which are expected to dominate the Android tablet market. All of these factors will slowly chip away at Intel’s relevance in modern computing.
To save money, Intel intends to spend less on new plants, equipment, and research & development. Capex (capital expenditures) are expected to drop to less that its previous forecast between $12.1 billion to $12.9 billion.
Shares of Intel currently trade at 9.6 times forward earnings, with a 5-year PEG ratio of 0.9. The stock is up 21% over the past twelve months, but down 4.9% over the past five years. Intel pays a quarterly dividend of 22.5 cents per share, a 3.7% yield at current prices, making it a popular choice for blue chip income investors.
Other News About INTC
Intel Corp Lowers Q3 2012 Revenue Guidance
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