Technology Moves Lower Following Lower Revenue And Gross Margins at Intel

Dec.12.11 | About: Intel Corporation (INTC)

Along with today’s overall weakness in the morning market session with the S&P 500 Spider ETF (NYSEARCA:SPY) down over 1.5%, several major technology giants are trading hands for a discount compared to Friday.

Intel (NASDAQ:INTC) lowered fourth quarter revenue expectations, driving the share price down over 4% in morning trading with higher than average volume. Hewlett Packard (NYSE:HPQ) opened trading down over 2%, but also opened near the low of the morning session and climbed higher as the morning trading session carried on. Part of the move lower by HP can be attributed to HP trading ex-dividend today with a dividend of $0.12 for owners of record on Friday.

Click to enlarge

Dell (NASDAQ:DELL) opened lower as well, but unlike Intel and HP managed to remain within the trading range on Friday.

Here is a look at fiscal year revenue for Intel.

paid2trade.com revenue gross bar chart for INTC Click to enlarge

Intel cited supply disruptions as a leading cause of the lower forecast. Intel reported hard disk drives are facing shortages as a result of Thailand flooding and softness in the world economy. Thailand has witnessed some of the most crippling and damaging floods in recent memory. At the same time Intel is expecting personal computer sales to continue to sell well at the same time supply inventories continue to get lean.

Click to enlarge

Intel is expecting fourth quarter revenue to decline from $14.7 billion to between $13.4 and $14 billion, with $13.7 billion as the target. Along with a revenue decline, Intel is disappointing investors with a tightening of gross margins. Intel is expecting a drop from 65% gross margin to a number closer to 64.5%. I am having a difficult time getting my head wrapped around the gross margin loss and hard drive supply disruptions. Intel is not a big player in storage, but Intel does have Solid State Drive (SSD) solutions that I would have expected to benefit from traditional storage supply problems. China is listed as the country of origin for Intel SSDs, but of course that is the last significant country and parts likely come from a variety of countries.

I remain bullish on Intel and Hewlett Packard despite the downward guidance by Intel. I recently wrote this article about Hewlett Packard and I am long in my long term core holdings. I will also collect the respectable dividend shortly as a result of Hewlett Packard trading ex-dividend.

All the major daily moving averages are moving higher with Intel, and the current pullback in price is setting up a buying opportunity. I have bought and sold Intel several times this year because it is a stock I am willing to own for a long time, but also one with a price moving around enough to profit from volatility.

I always trade Intel with options and my preferred method is to sell the first out of the money strike puts in the front month. Intel has had a very nice run up in share price so I will likely keep the power dry and see if the pullback continues through the week. If so I will be looking to sell January $20 put options (again, the $20 strike will have to be the first strike out of the money). Its true December will be the front month on Thursday or Friday, but the December series expires on Friday, so I will consider the January series to be the front month in this trade. January will be very active by Thursday so liquidity will not be an issue.

Dell is another winner long-term that I will look to sell volatility absent material changes if the price fades below $14 per share. Without a dividend, I prefer to view Hewlett Packard as the stronger candidate for my technology investment dollars currently.

I use a proprietary blend of technical analysis, financial crowd behavior and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are similar. Nothing in the article should be considered investment advice, but you may want to use this article as a starting point of your own research with your financial planner.

Disclosure: I am long HPQ.

Additional disclosure: I may enter a long position with INTC via shorting PUTS this week.