Checks with desktop and notebook builders show that the red-hot chip market, which lit up in late summer in anticipation of the Windows 7 launch and eventual Christmas buying, is beginning to cool off.
Such a cooling down is typical of the season. The first quarter is always down measurably from the fourth calendar quarter of the prior year. Christmas sales are past and the next big cycle of PC components, like CPUs and GPUs, comes in the late spring, which is actually in anticipation for the fall.
FBR Capital Markets conducted its monthly check of the top five notebook ODMs (original design manufacturers) and the top four desktop motherboard makers, and found things are slowing when compared to last month.
Although the sales for chip makers are recorded in the fourth quarter, most of these parts are going into computers that won’t go on sale until the first quarter of 2010. Overall, FBR now forecasts fourth quarter PC builds to decline 1.5 percent from the third quarter, quite a change from the five percent sequential growth it had been expecting just last month.
Not surprisingly, there is a big split between desktops and notebooks. Notebook builds are expected to grow nine percent sequentially while desktops are expected to decline 16.5 percent sequentially. Last month, FBR was expecting 11.5 percent growth for notebooks and a 4.5 percent decline for desktops.
Demand for CULV notebooks slows
The slight negative revision to Q4 notebook builds is due to lower-than-expected demand for consumer ultra-low-voltage (CULV) models, lower-than-expected October shipments, some component shortages, and a possible third-quarter build-ahead. There had been fears of too much product being built in anticipation of the Windows 7 launch in October.
For now, FBR is maintaining its positions on Intel (NASDAQ: INTC) and AMD (NYSE: AMD). “Intel likely tracking in line with guidance midpoint, but could see guidance risks on another cut to 4Q build plan,” wrote analyst Craig Berger in a research note.
“We are leaving our Intel EPS estimates unchanged for now, but we note a negative bias to our estimates and will wait until we conduct our next round of PC checks one month from now before taking any actions with our 4Q estimates. Indeed, we think Intel is tracking to grow revenues by 4-to-8 percent sequentially in 4Q, about in line with the firm’s revenue guidance midpoint,” he continued.
AMD is also holding up, and in better shape thanks to its recent debt restructuring. “We think AMD could grow revenues 0-to-4 percent sequentially in 4Q, in line with the firm’s revenue guidance,” Berger wrote.
With the debt repayment plan, AMD’s interest expense should fall by roughly $38 million annually, contributing $0.05 to annual EPS. As such, FBR raised its 2010 EPS estimate from a $0.03 loss to $0.10 gain due to lower interest expense and depreciation, since it no longer has the headache of its foundry expenses.
