Intel stuck to its prediction of a second-half recovery in its microprocessor business last night. Now the burden falls to consumers and businesses to make that prediction come true.
For the record, Intel’s
quarter was abysmal, with revenues falling 24% to $6.3 billion and pro forma earnings falling 76% to 12 cents a share, a penny better than estimates. However, those earnings were helped by a 1-cent gain due to a lower tax rate, and excluding the requisite charges, actual earnings were 3 cents a share, a 93% plunge from a year ago and a 57% sequential drop from the first quarter. About the only good news was that margins haven’t suffered as much as feared from the company’s price war with AMD.
And now for the fun stuff: Intel went out of its way to say that the year-over-year earnings comparison suffered due to a $2.1 billion investment gain realized in Q2 2000, compared to a $3 million gain this quarter. The company reportedly lobbied analysts last year to get those investment gains included in earnings estimates. Now that it’s coming back to haunt the company, they want investment gains excluded from results. Who says you can’t have it both ways? I guess the good news is that Intel has made better investments than Microsoft, because the company only plans to write off $100 million in bad investments next quarter.
And now for the forward guidance. A quote from CFO Andy Bryant: “We’re comfortable that the Intel architecture business has returned to seasonal patterns and will show more strength in the second half.”
A bold prediction, but one that wasn’t backed up by the company’s forecast, which was more of a revenue warning for the third quarter. The company predicted revenues of $6.2 billion to $6.8 billion next quarter, versus a current consensus estimate of $6.67 billion. Guidance that wide also means the company isn’t that sure of its own forecast.
Of course, second-half strength could mean strong holiday sales. That would line up with when the company plans to have the Pentium IV in full production at a favorable price point. The problem with that, though, is that consumers have to find the new product compelling enough to buy in a slow economy, and it’s not a done deal that the new Windows XP/Pentium IV combination will be compelling enough to pull the PC sector out of its slump.
All in all, another disappointing report in a generally disappointing earnings season. It now falls to IBM tonight to give the bulls some reason to drive this market higher in the near-term.
In the meantime, we see no reason to change our month-old call for Nasdaq 1870. And Intel remains overvalued at a 2001 price-to-earnings ratio of 55, and trapped in a three-month trading range between 26 and 32.50. A break of either end of that trading range could be worth a 20% move.