Winners and Losers From Intel's Warning

When the undisputed kingpin of the semiconductor industry, Intel (Nasdaq: INTC  ) , makes an earnings or demand announcement, the effects ripple far and wide. So when Intel announced Friday that revenue is going to come in below expectations, an already jittery industry took one step closer to the edge.

Join the club, Intel
Intel's warning focuses on consumer weakness, which isn't exactly new information. It can join NVIDIA (Nasdaq: NVDA  ) in the blaming-consumers-for-worse-than-expected-results club. NVIDIA closed out last quarter with $811 million in sales, significantly below its initial guidance of $950 to $970 million. The culprit behind NVIDIA's stunning revenue miss: weak consumer demand. Oh, and the favorite punching bag of executives blowing earnings: Europe.

Buy this smartphone, not that PC
Beyond the general economic woes that are causing consumers to spend less, the PC industry faces an alarming shift in consumer spending habits. The explosion of smartphones and tablets isn't causing consumers to spend more on electronics; the Consumer Electronics Association expects consumer electronics sales to be flat in 2010.

Instead, consumers are shifting their electronics dollars away from expensive PCs, where Intel gets higher sales and better margins, and toward tablets and smartphones, where Intel's processor offerings either aren't as competitive or don't exist. The average age of PCs has risen to its highest level in a decade, 4.4 years. Consumers are sticking with old PCs while buying the newest iPhone or Blackberry.

That should spell some future problems for AMD (NYSE: AMD  ) . When Intel reported its last record-shattering quarter, strong enterprise spending was the driving factor. AMD's recent quarter focused on its strength in the consumer market. Whatever pains Intel is seeing should only be amplified at its smaller rival.

More winners and losers
However, while Intel's results should have a general downward pull on the IT industry, it'd be wrong to apply that weakness to a wide swath of companies.

For one, Intel affirmed that demand from large companies remains strong. That's good news for companies targeting sales to large businesses. Outside of semiconductors, the announcement shouldn't reflect any weakness in companies such as EMC in the booming storage industry or enterprise-focused sellers like STEC (Nasdaq: STEC  ) . Nor should the announcement have much of an effect on semiconductor companies Qualcomm (Nasdaq: QCOM  ) or Broadcom, which derive significant sales from the smartphone market. Intel's warning only further points to the continuing success of small, connected devices.

However, the warning is a bad omen for hard-drive makers Western Digital and Seagate (Nasdaq: STX  ) . These two companies have higher exposure to PCs, and less to booming markets like smartphones that use solid state drives (SSDs). Neither Western Digital nor Seagate have much exposure to those markets. The warning is also bad news for an obscure software outfit from Redmond named Microsoft (Nasdaq: MSFT  ) , which presumably sells software that are on most PCs.

Bottom line
Intel's announcement once again demonstrates the significant shift going on in consumer spending. That shift puts all the more pressure on Intel's new Moorestown processor to enter the market and be a smashing success. The winners of a previous technological generation are rarely the winners of the next. Unless Intel wants to be another example of that axiom, it'd be better off spending less money buying software companies and more money winning the war to power mobile phones and tablets.

Fool.com analyst Eric Bleeker owns shares of NVIDIA. Intel and Microsoft are Motley Fool Inside Value choices. NVIDIA is a Motley Fool Stock Advisor recommendation. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 29, 2010, at 10:32 AM, liveoilfree wrote:

    You said "811 million in earnings". Perhaps you meant "revenue".

  • Report this Comment On August 29, 2010, at 1:10 PM, TEBuddy wrote:

    AMD, while gaining market share in graphics processors and winning more notebook designs its revenue may not be hit as bad as Intel's. Just like all the smartphone companies may not take as big of hit. When in a rut the world turns to the value options, and AMD notebooks and PCs can be had at lower prices. AMD has only grown and increased revenue through this entire recession, thay can continue, especially as their server division outperforms Intels in performance per watt and cloud computing.

  • Report this Comment On August 29, 2010, at 2:14 PM, TMFBrich wrote:

    @liveoilfree:

    You're right. Apologies for the mistake. We've corrected the article.

    Best regards,

    Brian Richards

  • Report this Comment On August 29, 2010, at 3:54 PM, lazytype wrote:

    with PE ratio around 10 you can't go wrong with intel. loosers are selling

  • Report this Comment On August 29, 2010, at 10:00 PM, goldfools wrote:

    Brian,

    you clearly do not understand what Seagate's business is about. Do you realize that Seagate's market share of the HDD Enterprise market is 60%? Also, of the total revenue spent by EMC/NTAP/etc on hard drives and solid state drives, 99% of it is due to hardrives. Thus 1% of the Enterprise XXD spending is due to solid state drives (SSDs). THE COMPANY TO BENIFIT the most from a strong enterprise market is SEAGATE. But wait, thats not all folks! Seagate has just announced a venture with Samsung to design some of the biggest, fastest SSD's in the universe. But isn't the future all about the CLOUD? (As exhibited by HP/Dells bidding for 3PAR). Seagate has constructed 8 eight high-availability SAS-70 Type III- and IV-certified data centers. Yep Seagate is all over the CLOUD tsunami. Seagate expanded its Cloud customer base to more than 22,000 and increased its employee count by 35 percent to more than 500 employees (i365 subsidiary). It also has joined the exclusive Microsoft Global ISV program.

    Hey folks, I have more! Seagate along with its peers (WDC) are trading at a bloated 3-4PE (trailing and forward). Trading at 0.4 times sales. Just gone done making $1.6 BILLION this last fiscal year, will be making another $1.4 BILLION this next year. Has a market cap of $5 BILLION. CLEARLY, Seagate/WDC are trading at bankruptcy levels. They are both prime for a takeout via a LBO. Ahhhh, but I digress. A strong Enterprise rebound is a VERY BULLISH sign for SEAGATE.

    - Barry

  • Report this Comment On August 29, 2010, at 11:52 PM, TMFRhino wrote:

    Blargh, link had a parenthesis. Here it is again.

    http://www.fool.com/investing/general/2010/07/12/buy-sell-or...

    Also, if the company that will benefit the most from an enterprise rebound is Seagate, how come the company saw sales down double digits sequentially when EMC was up mid-single digits last quarter?

    Again, I really do like the company at this valuation, I just think you're underestimating their consumer exposure.

    Fool on!

    Eric Bleeker

  • Report this Comment On August 30, 2010, at 11:32 PM, goldfools wrote:

    Eric,

    let me answer your questions, as it relates to your comments

    "First of all, we already saw the effects of poor consumer spending effecting STX/WDC and even MRVL in their latest earnings announcements. " AND "Also, if you think consumer PC spending hasn't hurt the HDD members, I'd say to go back and check their recent earnings reports again."

    It's been know within the hard drive industry that there was a manufacturing issue that crippled seagates bread and butter products. Hence it effected the entire industry. That was a one time deal. Also, their recent earnings report showed that they produced near RECORD earnings. Yes, I'll repeat that. They almost had record earnings. Last quarter is always the slowest quarter of the year for the hard drive industry. So trying to compare sequential quarterly numbers is a bad idea, as the industry exhibits high seasonality. Also, during the last fiscal year, when global lending froze shut and the world was in a recession, Seagate produced a RECORD $1.6 BILLION in earnings. The consumer was no where to be found, but Seagate still cranked out the profits.

    What you don't seem to understand is where seagate makes its profits from. Believe it or not, Seagate makes almost all of their income from the Enterprise sector NOT the consumer/PC sector. Thats why I replied to your article. Seagate investors would rather have a robust Enterprise market than Consumer market.

    - Barry

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