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Here we go again. Intel (Nasdaq: INTC) lowered Q3 expectations on Sept. 7, from the previously announced $13.8 billion to $14.8 billion range in revenues, down to $13.2 billion -- give or take $300 million or so. If the new estimates are correct -- which they won't be -- what is historically Intel's biggest quarter will end up well below Q3 2011. Last year at this time, the Santa Clara, Calif.-based chip giant generated $14.2 billion in sales.
As an avid follower of all things Intel, why does this latest news elicit little more than a yawn? Because I've seen this movie before, and if you know Intel, you have, too. Playing the earnings expectations game is nothing new; Intel just does it more often and is a little better at it than most.
A long history
There have been countless studies, assorted research, and other analyses done over the years on companies, like Intel, that manipulate the expectations system. Not that the studies were necessary: Empirical evidence is overwhelming to anyone that follows such things. Intel CEO Paul Otellini and crew are content taking small hits to Intel's stock price now, just as they did last quarter. Why? Because Intel knows that when actual Q3 2012 earnings are announced Oct. 16 -- which will either exceed or be on the high-end of "expectations" -- the bounce that follows will make up for the near-term drop in share price.
Back to basics
Irrespective of the earnings gamesmanship, it doesn't take much digging into Intel's financials to recognize it's a fantastic value and should be a mainstay of most portfolios. The concerns lamented by Intel naysayers generally boil down to one thing: The PC market is dying, and as the leading provider of personal computer microprocessors in the world, Intel is going to go along with it. Not likely.
Hewlett-Packard (NYSE: HPQ), however, is on the other end of the spectrum. HP has been slower to react to the declining PC market, and investors have punished HP, as the 32% decline in share price year to date attests. Last quarter's nearly $11 billion one-time expense was the reason for HP's poor numbers, but even removing that expense leaves HP with yet another quarter of declining earnings.
As for Intel, Otellini is aware of the trend toward mobile computing and the cloud and is taking definitive steps to become a major player in these exploding markets. Intel already has a commanding position in the server market, ending 2011 with a 16.5% market share, the highest ever for Intel. As more companies shift to cloud technologies, Intel will be able to leverage its dominant server product sales and grow along with the marketplace.
And let's not forget the all-important chips used in mobile computing, both smartphones and tablet computers. Intel seriously entered the mobile market earlier this year, inking partnerships with Lava International, Orange, and ZTE. And these were in addition to working relationships already in place with Motorola Mobility and Lenovo.
Both Motorola Mobility (now a part of Google) and Lenovo are expected to begin shipping smartphones with Intel's Atom chips in Q3 of this year. An advanced Atom chip, the Z2580, will double the speed of the original Atom chip and should be ready for customer use the first half of 2013.
Eating away at the smartphone and tablet chip market share from NVIDIA's (Nasdaq: NVDA) well-received and growing Tegra mobile computing products, let alone current market leader Qualcomm (Nasdaq: QCOM), isn't easy. But with 16.5% of the market in both servers and PCs, $13.6 billion on the balance sheet, and a rock-solid management team, don't count Intel out.
An even better value
For investors late to the Intel party, the recently lowered earnings expectations for Q3, and subsequent drop in share price, is tailor-made. At about 11 times earnings, Intel was already undeniably cheap. Now, at just over 10 times earnings, boasting outstanding margins, and a 3.59% dividend yield, Intel is as close to the ideal stock as you'll find.
Don't fall into Intel's earnings expectations trap; it's just business as usual. Instead, take advantage of what this is -- a great opportunity to own a piece of one of the world's great companies at a ridiculously inexpensive price.
If you're intrigued by what Intel has to offer, or unsure whether it makes sense for your portfolio, (as always) make sure to do your homework. For a complete breakdown of the potential, and the risks, of investing in Intel, make sure to check out our premium report.
