Do Not Expect an Encore from Intel

Intel (INTC) delivered a stellar earnings report Tuesday evening with revenues and margins that beat expectations. However, do not expect an encore in the near-term because INTC’s historical performance suggests this may be as good as it gets for a while.

Q3 revenues were $9.4B with consensus expectations for $9.04B. The 17% sequential growth in revenue from Q2 to Q3 was INTC’s largest in over 30 years. Gross margin soared seven percentage points to 57.6% vs. 55.5% consensus expectations. (See CFO comments for all earnings details.)

This continuing record of strong performance has clearly boosted INTC’s confidence in its business. In particular, INTC ramped its gross margin projections to a range of 59-65% based on:

1. Qualification for sale of 32nm products and sales of the previously written-off product
2. Higher CPU sales volume
3. Lower excess capacity charges

This range puts INTC’s margins at the very top of its recent historic range (charts below generated from Gridstone Research), so I am inclined to believe that margins will not improve much further from here and should not experience another leap of seven percentage points.

INTC's annual gross margin has remained below 60% since 2003

INTC projects quarterly margins to return to the top of last year's performance

The Q4 revenue guidance of $9.7-10.5B is above the consensus of $9.51B. The lower end of the range is just a shade over consensus but more interesting is that INTC’s CFO noted “the midpoint of this range is…consistent with the average historical seasonal increase.” In other words, INTC is expecting business as usual and not a unique or organic surge in business.

The good news, of course, is that these numbers likely confirm that we continue to pull out of the recession. These data should also rule out any significant earnings-related correction for the stock market at-large this Fall. Prior to these earnings, the technical action in INTC’s stock suggested that a correction was imminent with a likely peak in August formed when INTC increased its revenue guidance. The chart below shows that INTC quickly faded after that first up-gap day. Within three days, the gap was filled, and by October 1st, INTC looked like it would soon test August’s lows. The subsequent rally, and now these earnings, have pulled INTC’s chart out of the “danger zone” for now.

INTC almost lost the momentum from Aug highs

*Chart created using TeleChart

While I insisted last October that I bought INTC for a 3-5 year run, and managed to hold it through the pains of the March lows, I could not resist taking the 25%+ total gain I had generated after INTC reported its Q2 earnings in July. Based on this latest earnings report, I personally would not buy INTC back. I think INTC will be very hard-pressed to deliver a repeat performance anytime soon. While it is clear that retailers must be stocking up in anticipation of a relatively strong holiday season for computers, I think there is an exceptionally high risk of disappointment for those sales. I will reconsider the investment thesis after INTC’s mid-quarter and Q4 reports.

In the meantime, be careful out there.

Full disclosure: no positions.

Comments

[analysis101vp:]

You're clueless. Intel is on the verge of a huge upgrade cycle and their current stellar results came in during a very tough economic cycle. Intel will surely prove you wrong and stock will go much much higher from here. YOU KNOW NOTHING!

Oct 14 10:25 AM

[Tom B:]

" Intel is on the verge of a huge upgrade cycle" You think? In this recession?


On Oct 14 10:25 AM analysis101vp wrote:

> You're clueless. Intel is on the verge of a huge upgrade cycle and
> their current stellar results came in during a very tough economic
> cycle. Intel will surely prove you wrong and stock will go much
> much higher from here. YOU KNOW NOTHING!

Oct 14 11:56 PM

[Dr. Duru:]

Day #2: INTC has completely lost all of its post-earnings gains. Not a great start to the massive upgrade cycle.

My main point was that we should not expect the kinds of huge upside surprises INTC has delivered this year for the near-term (like next several quarters).

Thanks anyway for the attempt at providing constructive criticism.

On Oct 14 10:25 AM analysis101vp wrote:

> You're clueless. Intel is on the verge of a huge upgrade cycle and
> their current stellar results came in during a very tough economic
> cycle. Intel will surely prove you wrong and stock will go much
> much higher from here. YOU KNOW NOTHING!

Oct 15 02:50 PM