The well-known chip maker Intel (INTC +2.35%) was one of several components of the Dow Jones Industrial Average (^DJI 1.63%) to report third-quarter earnings yesterday. Following the announcements, the blue chip index closed higher by triple digits.
Amid a smaller wave of earnings today from the likes of Bank of America (BAC 1.05%) and American Express (AXP 2.11%), however, the market appears less certain of its direction. While it's started the day out lower, it's in the process of crossing into positive territory following news that domestic housing starts surged 15% last month to the highest level in five years.
How did Intel do?
As you can see below, Intel beat the consensus estimates on both the top and bottom lines. Revenue came in at $13.5 billion compared to an estimate of $13.2 billion, and earnings per share were $0.58 relative to an expected $0.49.
|
Metrics |
Actual Results |
Consensus Estimate |
Last Year |
|---|---|---|---|
|
Revenue (billions) |
$13.5 |
$13.2 |
$14.2 |
|
Earnings per share |
$0.58 |
$0.49 |
$0.65 |
Despite beating estimates, shares in the chip maker are nevertheless down sharply today, trading lower by more than 2.5%. Following in its wake, moreover, are the other technology companies on the Dow. IBM (IBM 1.89%) has dropped 4.3%. Cisco Systems (CSCO 2.11%) is down 0.9%. Hewlett-Packard (HPQ 2.80%) is trading lower by 0.6%. And Microsoft (MSFT 1.87%) is lower by 0.4%. What gives?
The reason for this has to do with the three related factors discussed below.
1. Declining personal computer sales
The fact that the PC industry is struggling shouldn't be a surprise to anyone. An article in The Wall Street Journal last month summed it up perfectly, noting that: "The personal-computer business has entered a tailspin." Among other things, it cited research that PC sales fell more than 8% in the third quarter and that projected PC shipments for the full year would decline for the first time in 11 years.
The problem for Intel is that PC-related sales account for a full two-thirds of its entire revenue. In the most recent quarter, its PC Client Group recorded $8.6 billion in sales relative to the company's total revenue of $13.5 billion. Thus, as the PC industry goes, so goes Intel. Its revenue from that operating group fell by 8% on a year-over-year basis.
2. Downbeat revenue forecast
Earlier in the year, Intel's leadership downgraded its forward revenue and earnings guidance, noting that a "challenging macroeconomic environment" was causing "softness in the enterprise PC market" as customers were "reducing inventory in the supply chain versus the normal growth in third-quarter inventory." Shares in the company fell sharply following the announcement.
On its third-quarter earnings call yesterday, the company reinforced this message. After noting that the overall PC business will grow at about half its historical rate for the remainder of the year, Intel's CEO Paul Otellini said: "Our revenue forecast growth is below these levels, as our customers are taking a cautious inventory approach in the face of market uncertainty and the timing of the Windows 8 launch."
Needless to say, this message did not instill confidence in traders, as shares in the company fell sharply following the news.
3. Growth in tablets and smartphones
The principal reason that Intel's core business, PC sales, is struggling relates to the concomitant growth in the tablet and smartphone businesses. While the company is purportedly making products to take advantage of these trends, little evidence of that exists thus far.
Again, according to the Journal: "Intel executives have tended to play down competition from Apple's [(NASDAQ: AAPL)] iPad and other tablet-style devices, and they didn't mention that factor in their prepared remarks [in Tuesday's conference call]. But analysts believe the competition has been a sizable drag on PC demand, particularly in industrialized countries."
