Intel Corporation (NASDAQ:INTC) is the world's largest semi-conductor chip maker. Though its primary business is making chips and processors for computers, it is also diversified into other electronics. Intel is holding close to 17% of the $309 billion semi-conductor market. Its closest competitors, Samsung (OTC:SSNLF) and Texas Instruments (NYSE:TXN), hold 9.7% and 4%, respectively. Intel's sales for this year will total just over $51 billion, not quite a 1% gain over 2010. Despite these impressive numbers, Intel just isn't in a position to keep investors interested into 2012.
Third quarter earnings, reported in October, far exceeded analyst expectations. Sales of semi-conductors in emerging markets offset a weak U.S. market and drove Intel to a new sales high. Sales increased 28% in the third quarter to to over $14 billion. Revenue, operating income and earnings are all up versus Q2 of this year and the previous year. Intel's sales gains were further helped by strength in processor and server sales. These figures don't take into account what the rest of the semi-conductor sector seems to know; demand for tech is waning.
Global slowdown is a major problem for Intel. Business inventory is building up at the same time need for business infrastructure is in decline. A string of natural disasters in Asia is also impacting the market. There are problems with delivery of PCs from Thailand due to widespread flooding, inventory levels were elevated going into the fourth quarter and Japan is still rebuilding after the tsunami. These issues are only part of the trouble facing the electronics sector. Oracle (NASDAQ:ORCL) missed earnings this quarter, proving my point. Demand for technology is weakening and will impact the entire sector. Total semi-conductor sales growth has been revised downward by 1% to 2.2% in the next year. Advanced Micro Devices (NYSE:AMD) announced job cuts and other cost cutting measures earlier in the year, foreshadowing troubles yet to come. In similar news, Texas Instruments posted lower numbers in Q3 and is expecting further declines, blamed on weak demand in the U.S. and Europe. Number 2 chip maker, Samsung, also saw a 13% drop in its Q3 earnings.
On the technical side, Intel is near the top of a long term trading range. Currently trading around $24, Intel is bouncing off a long term resistance level. These same charts indicate Intel is overbought. Short term and long term, Intel is poised for a pullback as big as 16%, a move that would leave Intel in the $19 range. Should Intel break above $25,and that would be a Christmas miracle, it will meet with more resistance at $28, near the top of its ten year range. The tech sector, represented by the Select SPDR XLK, has been trending sideways for years and is giving very bearish signals. Intel, which is tracking nearly in line with XLK is a prime target for shorts.
As a hold, Intel is attractive. Assuming you have the right average cost, the dividend pays 3.5%. Intel will continue to lead the market as an innovator and producer of semi-conductors. The stock won't be a loser over the long term but there will be a better time to buy. Once the current issues work themselves out Intel will be attractive again.
Currently, Intel is way overpriced. I can't see any reason for it to break above the current level and many reasons for it to decline. Intel has been riding a wave of news driven by smoke and mirrors. This wave crested in October when AMD and Texas Instruments lowered their outlooks. Oracle is just the beginning of the crash. I think the entire semi-conductor sector, and the tech names that depend on it, are in for a big correction.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.