Dell pulled off a great trick last night -- they blew the quarter (10% lower than low end guidance pre-warning), dropped profit 18%, and gained 4% in the after hours. How? They announced they are going to start using cheaper AMD chips. This move was called on Tuesday by David Jackson of Seeking Alpha in this post (and congrats to him on a great trade):
I’ve come to the conclusion that there is linkage between Dell and Intel. As Dell loses market share to competitors using cheaper and faster AMD chips, it will come under pressure to use AMD chips. So there’s a direct correlation between Dell’s market share losses and the risk to INTC. One way of looking at this is to ask yourself the question: How would these two stocks react if Dell announced that it will begin to use AMD chips? I think DELL would rise and INTC would fall. The fact that DELL would rise tells you there’s linkage. Full disclosure — I bought DELL stock today at just under $24.
This 4% rise is a serious overreaction to Dell's proposed cost cuts, which seem overly ambitious and may not lead to profits as they are combined with revenue cuts. But at least they're doing something, so we should give them a pass until the next quarter.
The trade to make out of this is Intel, who got drop kicked 5% by investors in the after hours to $17.71 - a severe overreaction. Even Dell CEO Rollins said "It's a fairly small category in terms of units, we will still be launching this year a broad line of Intel products. We think we've got a winning combination of bringing great technology to all customers."
The last time Intel was below $18 was 2003, when earnings were 40% lower than they are now. Intel will wake up in the morning with a P/E of about 13 -- half the sector average. I have to look at the Jun $17.50 calls, which should be about .60 in the morning... I just have to!
I also have to think about the Jan '08 $20s if they are under $2, as I can sell the Jun $20s for .20 for a nice monthly income.
AMD shot up 12% on the news and they do deserve it as it is a major victory for them and the Opteron platform but it makes them too pricey for my tastes in this market.