Intel: Nice Performance, But ...

Includes: AMD, INTC
by: Karl Denninger

Intel (NASDAQ:INTC) reported yesterday afternoon 40 cents on $10.6 billion.

The front-line read is that the results are very good. Note that estimates had been cut from 44 cents to 30, so the "beat" that everyone says is a "crush", well....

Gross margins were an incredible 65%. This is unlikely to hold and it's difficult to see how they can improve on it. If inventories go up, margins will come down. Great this time, on a forward basis a bit more troubling.

ASP (selling price per unit) was up sequentially. That's good. The problem with ASP being up is that it means volumes aren't as up as the revenue numbers suggest.

Looking inside the report two of my key numbers are PC chipset and motherboard revs - they were up just 2% sequentially. On the data center side chipset and board revs were up 7.7%. Comments before the conference call were that strong business sales were not showing up, but that personal system sales had more-or-less "normalized." Given that Windows 7 shipped this last quarter I would have expected better than "normalized", but nonetheless the results in terms of revenue were solid.

It appears that Intel is attacking AMD (NYSE:AMD) in a severe way, and their conference call is noting a significant move toward 32nm architecture in their server processors. Assuming they continue to execute, this will be very helpful; I have several Nehalem-based Xeon machines and the price-performance in the 55xx series is exceptional. The 32nm process should be even better, specifically due to lower power consumption allowing more cores in less space given heat and power management realities.

The conference call spoke to strong contribution from the initial "high end" introduction of 32nm processors. This will bleed downward (and the company is acknowledging that on the call) as they move the 32nm process into the mainstream and "value" markets which will drop ASP. Volume would be expected to be up but selling price-per will be down.

Overall there's nothing bad in this report at all and Intel turned in a solid performance. My concern is with valuation advances - 4Q is typically the best of the year due to the holidays, so if we give them $1.50 for the four sequential quarters ($1.10 for the next three sequentially) this would place their P/E at about 15 - quite reasonable and down a lot from the current ttm (prior to this quarter) of 52.

The stock traded up on the release but has fallen back substantially as you can see here. I suspect seasonal factors and concerns about both inventory and product mix forward will bring down ASPs, and margins are unlikely to advance from here. Both of these would imply that the earnings expressed here are about as good as we're likely to get for a while, and that means the stock is reasonably-valued at the current price, as the mitigating factors should work on balance in a negative direction.

On balance the report shows solid execution by the company - but in terms of the stock price I wouldn't be expecting too much over the next 6-12 months. If I owned the stock coming into earnings I'd give serious consideration to taking my profits - they've been substantial from early 2009, with the stock having advanced from the $12s. Should it trade back down to $15 or so (and it might in the coming six months) I'd be inclined to accumulate it, assuming that there are no indications that they're stumbling moving the 32nm process into their more mainstream offerings.

Disclosure: No position