Shares of Intel (INTC +7.06%) fell as much as 5.9% this morning, followed by a 3% drop for Microsoft (MSFT 0.50%) stock. The two technology titans fell in unison on a generally positive market day. Microsoft and Intel were almost the only losers among the 30 Dow Jones (^DJI +0.66%) components this morning, as 27 of these blue-chip stocks traded up on a strong jobs report.
So, what's wrong with Intel and Microsoft today?
In the early Thursday dawn, Intel published an update to its first-quarter revenue guidance. The microchip giant rarely provides midquarter guidance corrections, so it's usually big news when it happens.
In 2012, for example, a sudden drop in Intel's corporate PC sales sparked one of these negative guidance updates -- and a 30% share price drop over the following 10 weeks. On the other hand, another corporate PC-driven midquarter update in the opposite direction started a 34% surge in Intel shares last summer, spanning six months.
In both cases, Microsoft followed suit because Intel's market-defining news also involved Microsoft's Windows and enterprise software businesses in a very direct way. That's not exactly what's happening again today, but we're back in the same ZIP code at least.
Image source: Intel
Citing weak demand for business-grade PC systems and low inventory levels across the PC industry, Intel tightened its first-quarter sales guidance and lowered the midpoint by 7%.
Behind the curtain, Intel explained that small and medium businesses are upgrading their old Windows XP systems at a slower pace than expected, denying Intel and Microsoft a long-expected growth catalyst. Moreover, macroeconomic trends and the rising exchange rate of the U.S. dollar against other world currencies only deepen these revenue problems.
Intel assures us that gross margins are holding steady, the data center segment is performing as expected, and the company's R&D budget remains untouched. All other guidance is off the table until Intel reports its full first-quarter results on April 14.
Microsoft hasn't offered an official statement on Intel's report, but also seems likely to miss revenue targets in the current quarter if Intel's view of the Windows market is correct.
Follow the money, and you'll find that Intel's dividend timing only underscores the surprising nature of this new guidance.
As an Intel shareholder, I would much rather have seen this news two weeks ago, before the company paid out its recently boosted dividend. Low share prices are fun when you're buying stock, like many Intel investors do via automatic dividend reinvestment programs, as I do. Intel's management team and board of directors would agree, since they all hold significant amounts of company stock.
But the company isn't playing games with accounting and stock manipulation here. Intel is simply sharing some important market insights that popped up at an unusual time.
So, Intel shares are back down to prices not seen since last October. The stock is trading 18% below its 52-week highs, taking the edge off its 2014 rally in a big way. Will Intel investors continue to suffer, or has the market already priced in all the bad news?
We're looking at a 7% revenue miss in a single quarter. The drop does rest on some big industry trends, such as the undying popularity of increasingly obsolete Windows XP systems and a tough macroeconomic climate.
But I wouldn't suggest selling out of Intel thanks to one disappointing revenue turn -- and I don't plan to sell my own shares here.
Instead, I'll hold out for more clarity in April. The next earnings season will bring fresh market perspectives from Intel and Microsoft, reinforced (or undermined!) by other giants of the corporate PC industry. Until then, I'm content to sit on my market-beating returns over the last year or two.
It would be a shame to sell out just before Intel explains how this quarter will stick out like a sore thumb in a healthy long-term trendline -- and I'll have plenty of time to lock in profits if it turns out that the business PC market really is suffering from long-term problems.
In other words, one midquarter update does not define an entire industry. We Intel investors need more data.
Or, even more to the point: patience, young grasshopper.
