The world's biggest chip maker Intel is scheduled to report earnings on Tuesday, October 16th, roughly a few days after Advanced Micro Devices (AMD) announced that its third quarter revenue will probably be 10% lower than last quarter thanks to the weak global economy and also because more consumers are choosing tablets over traditional PCs. There have also been reports that Advanced Micro Devices will be slashing anywhere from 20% to 30% of its workforce with a full accounting expected on Thursday when the company reports earnings. Until then, all eyes will be on Intel (INTC), a key Dow Jones Industrial Average component, along with its earnings report as it could set the tone for the later Advanced Micro Devices earnings report along with those of other chip or PC makers. Likewise, Advanced Micro Devices has also partially set the tone for the Intel report as the latter's stock dropped from the $22.5 level at close of Monday of last week and ended the week just below the $21.50 level plus more investors may be waiting to dump shares after the upcoming earnings report. So what should your Intel investing strategy be?
The Numbers Wall Street Expects From Intel
To begin with, the latest summary of analyst estimates from Yahoo Finance shows that the Wall Street consensus expects Intel to report a 7.20% fall in revenue to $13.20 billion along with an EPS of $0.50 vs. $0.65 for the same period last year. The current EPS consensus estimate of $0.50 is down from the $0.65 consensus number three months ago.
For the year, the Wall Street consensus for Intel calls for a 1% revenue decline to $53.43 billion while EPS is expected to decline from $2.39 to $2.12; and for next year, the Wall Street consensus expects a 4.00% revenue rise to $55.56 billion along with an EPS rise from $2.12 to $2.16. Of course, investors should to keep in mind that these Intel estimates for both revenue and earnings can easily make big changes in either direction - especially if the global economy gets any worst or if there is a major sea change in technology.
In addition, investors should keep in mind that other chip or semiconductor related tech stocks that are scheduled to report earnings include Advanced Micro Devices on Thursday, October 18th; Texas Instruments (TXN) on Monday, October 22nd; Broadcom (BRCM) on Tuesday, October 23rd; and NVIDIA (NVDA) on Thursday, November 8th. However, Intel's earnings report will be closely watched as it's the first big chip stock to report earnings and a Dow component.
What Intel Reported Last Earnings Season
The last time Intel reported earnings, it reported a 5% sequential revenue rise and a 4% year-over-year increase to $13.5 billion while net income rose 3% sequentially but was down 5% year-over-year at $2.8 billion.
Intel's Q2 results could be an indicator of weak markets in Europe and Asia and any subsequent revenue or net income growth declines for Q3 and future quarters would only provide further evidence of such weakness or the strength of any weakness - something Wall Street will be watching for. A counterpoint to that could be that Intel's new 22nm technology process, billed as the world's most advanced process for manufacturing logic, no doubt still has some kinks to be worked out and the company does expect costs to fall quarter by quarter once it ramps up.
What You Need to Listen For
To begin with, the third quarter is an important quarter for a chip maker like Intel as the holiday season comes in Q4 (Note: Last year's Q4 was impacted by the floods in Thailand which disrupted supply chains around Asia), but all of the parts for the products sold during the holidays would be bought in Q3. That means any sign of weakness could be interpreted that the upcoming holiday season will be less than merry for the chip and PC businesses plus Hewlett Packard (HPQ) and Dell (DELL) have already announced that they are seeing a weak PC environment. That's not a good sign for Intel as a little more than 2/3rds of its revenue comes from the PC segment.
Likewise and back in September, Intel itself cut its Q3 guidance from the $13.8 billion to $14.8 billion range to $13.2 billion (plus or minus $300 million) on weaker than expected demand due to the challenging macroeconomic environment which is not exactly looking any better at this point in time.
On the other hand, Intel is heading into earnings with a market cap of over $100 billion (with a share price of around $21.50) while Advanced Micro Devices' market cap is now under $2 billion (with a share price of around $2.75). Hence, do not underestimate Intel's ability to window dress any problems (something sharp-eyed investors will need to be on the lookout for) nor its ability to overcome the current headwinds facing the chip and PC industry as it's certainly in a much better position than Advanced Micro Devices.
A Final Word About the Coming Intel Earnings Report
Certainly Intel is facing some headwinds going into the third and fourth quarters but again, investors also need to remember that the stock is a Dow Jones Industrial Average component - meaning it's not like the stock can simply be dumped by index funds and ETFs. On the other hand, a poor earnings report could have investors and other types of funds dumping other chip or PC maker stocks like Advanced Micro Devices, Hewlett Packard and Dell. Likewise and for the long-long term, just because Intel is a Dow component right now (like Eastman Kodak once was) does not mean investors can rest easy. Hence, a smart move for an investor already in and still in Intel could be to make an exit now ahead or immediately after its earnings report and consider getting back in when there is more clarity about the direction the global economy and the technology industry is heading in.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.