Chip giant Intel (INTC +2.20%) is limping into tonight's fourth-quarter report. Share prices have plunged 12% over the last six months, and the company faces larger challenges than ever before. Did the fourth quarter turn out all right, or should you expect the stock to plummet again after this report?
Let me first point out that Intel set the bar pretty darn low this time. CEO Paul Otellini set his revenue guidance at less than half of the typical seasonal growth, starting from an already weak third quarter performance.
The cautious revenue forecast of $13.6 billion (plus or minus $500 million) makes room for macro uncertainty and a potentially soft launch of Microsoft's Windows 8 platform, but also assumes that system builders would reduce their chip inventories through the end of 2012. GAAP gross margins should come in at just 57%, down from 63.3% last quarter and 64.5% a year ago. That hurts, but this soft guidance has already been priced into Intel's shares.
Swing and a miss? Not this time.
Now, Intel missed its own original targets last quarter. Investors may worry that it might happen again. But that would be a shocker.
Last quarter's miss was presaged by a timely (though painful) guidance update. We've seen no such reduction this time, which tells me that the goals will be met. Intel isn't the sort of company that likes to leave its shareholders hanging when there's material information to share.
Intel investors can take two diametrically opposed views of the stock right now. The recent plunge has pushed Intel's already generous dividend yield into nosebleed territory. That's either a red flag or a green-light signal. The stock itself is either a deep, rich value or a terrible value trap.
This report will give some fresh guidance to Intel's long-term health. It's becoming pretty obvious that Windows 8 is a relative dud so far. Will older Windows versions and alternatives like Linux servers keep Intel's good times rolling until Mr. Softy starts pulling its weight again? On balance, Advanced Micro Devices poses a smaller threat than ever in the shrinking market for traditional PC systems. How will those puts and takes add up in the long run?
On the mobile side of the fence, Intel introduced a number of mobile solutions at the CES trade show last week. Meanwhile, Qualcomm quietly passed Intel as the world's largest semiconductor company by market cap, largely thanks to its smartphone and tablet muscle. Intel's new low-power chips obviously didn't make a difference in the fourth quarter, but how does management see them playing out in coming periods?
Moreover, longtime CEO Otellini has announced his retirement, but hasn't named a replacement yet. The company has a history of very orderly succession planning, and Otellini signs off in May. The company should either name names or at least drop directional hints during tonight's earnings call. Chances are, the new leader will come with serious mobile qualifications, which points to an outside hire or Intel's own mobile division chief, Navin Shenoy.
What's next?
Personally, I believe that Intel has the brains and the muscle required to navigate these murky waters. So much so, in fact, that I bought shares a few weeks ago for my own portfolio. I'm looking forward to this report, because it will either confirm or debunk my entire investment thesis. Until then, my shares are up 12% so far with an effective dividend yield of 4.5%. It's hard to complain.
