Intel results indicate consumer spending strength; investor ignorance

Wednesday 16th January 2008, 12:11:00 PM, written by Arun

Intel released its quarterly results yesterday and while both revenues and profits reached record levels ($10.7B and $0.38/share respectively), they were still below expectations. Intel's stock dropped 14% in after-hours trading, and dragged other semiconductors along. But it turns out that reaction is most likely a massive misinterpretation of the data.

The justification for investors to be so annoyed at these results and the subpar Q1 2008 forecast is that it could be an early indicator of (consumer) spending weakness in the US and abroad. And while it seems reasonable to assume that based on an initial glance at the press release, the detailed data points disagree completely.

• The miss in Q4 was, according to Intel, exclusively due to their NAND flash group not meeting expectations. It does not indicate overall consumer spending weakness at all.
• This is primarily due to NAND pricing pressure (see our previous coverage), which analysts should already have included in their models had they done their homework and looked at the public pricing data. Hindsight might be 20/20, but still.
• CPUs and chipsets met expectations, with notebooks and servers being especially strong. Emerging markets played a big role for notebooks, so that could imply a lower-end mix and perhaps affect discrete GPU attach rates.
• Regarding their Q1 forecast, Intel's CFO had this to say in the conference call (see transcript): We see that NAND pricing will probably continue to be weak, so that’s a piece of it. [...] Based on what we see and economic indicators, we think it’s right to be a little bit cautious as we go into the year. [...] NOR tends to have exacerbated seasonality Q4 to Q1, so that moves our seasonality a little bit from what we thought. [...]
  
• And then Otellini said this regarding the economy in general: I said I have the same caution that I think that everybody in America who watches CNBC has today. You hear all of the pundits saying that the world is going to go to a trash basket and you worry. It may be a self-fulfilling prophecy. At this point though, we don’t see anything on the horizon.
  

Overall, Intel's results and forecast do little more than remind us of the weakness in the flash market and the extremely catious atmosphere reigning in the financial world. It would be pure madness to consider today's announcements as an indicator of an upcoming recession or at least an overall semiconductor slowdown.

Intel executives aren't seeing any sign of that right now, and their only concerns come from the analysts' own pessimism. That certainly doesn't make this a new indicator, and we don't think the industry should read too much into it. In the short-term, the semiconductor market (excluding memory chips) looks relatively strong to us. That doesn't mean it will last, but it should be kept in mind that today's data really doesn't tell us anything new.

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intel ± results, q4

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