Intel (INTC) released first quarter earnings today which are a highly anticipated bellwether for the semiconductor industry and more broadly the tech sector. This is a huge week for earnings and Goldman Sachs (GS) blew the doors off of their quarterly estimates yesterday getting the ball rolling for financials. Remember, Intel began to see difficulty in the chip business last year and lowered revenue and EPS guidance in October for the fourth quarter. Results from the fourth quarter were not great as profit fell 90%, and hit analysts estimates at just 4 cents per share. Furthermore, Intel decided against issuing revenue guidance for the first quarter because of the significant uncertainty in the marketplace. This lack of visibility has sent the stock down to levels not seen in many years.
“Let me just interrupt you guys for one second. I’ve got Intel earnings coming 11 cent as share on Intel, the estimate calls for profits of 3 cent as share. Revenue looks like better than $6.99 billion estimates. Revenue, $7.1 billion on earnings of 11 cent as share at Intel for the quarter. We do have activity on the down side in the extended hours here but we’re going to continue look that report and what’s behind the numbers and whether there is an actual guidance going forward…” CNBC’s Closing Bell 4/14/2009.
Intel only offered guidance on revenue saying it would be flat for the quarter ahead but EPS and margins did not get guidance. The bar for the first quarter had been set so low by Intel themselves, that analysts have been upping their estimates recently based on better than expected PC shipping data and promising developments in China. China and many emerging economies are likely to be big consumers of netbooks, which should be beneficial to Intel’s top line revenue but they are cheaper and provide less profit margin for the maker.
At Ockham, we believe that there is significant value in a Intel, which is why we have maintained an Undervalued stance for the half year. Intel is still the far and away market share leader and even though demand for computing has fallen off in the last year, when demand fully rebounds Intel will be one of the biggest beneficiaries of this. The trend to netbooks is happening as we speak, and in our view it is better to innovate with the market instead of fighting against it. Intel has historically had margins in the low 50% or high 40% range, and that has been dropping a bit. Margins may be compressed because of this trend but that may just be part of being a mature semiconductor industry. It seems to us that Intel selling down nearly 4% in after hours is a bit of an overreaction to the declining margins, and may present an opportunity for investors.