According to ValueWalk, Citigroup analyst Chris Danely believes Intel (NASDAQ:INTC) is "too bullish on its second half fiscal year 2015 outlook." The analyst reportedly believes Intel will need to revise its revenue projections for the year down -- again.
Danely points out that Intel is calling for 17% higher revenue in the second half of 2015 compared to the first half of the year. That's more than 3 times the company's five-year average sequential growth.
Should investors panic, or is this fear unfounded?
Understanding what's going on
Intel typically generates more revenue during the second half of a given year than in the first half of the year, because much of Intel's revenue comes from the sale of components that go into personal computers. PCs generally see stronger sales in the second half of the year than during the first half because of things like back-to-school shopping, holiday shopping, and so on.
According to Intel, PC vendors lowered their inventory levels during the first quarter of 2015, and are expected to lower them further in the second quarter of 2015. The latter phenomenon is, per Intel CFO Stacy Smith, "unusual."
The idea that Intel management has communicated is that since Microsoft's (NASDAQ:MSFT) Windows 10 is expected to launch some time in the summer, PC vendors should start rebuilding inventories starting in the third quarter of 2015.
What's all of the commotion here?
The major concern for the Citigroup analyst seems to center on the abnormally high revenue growth in PCs that Intel will need to see in going from the first half of 2015 to the second half of 2015. However, I believe that is precisely where the analysis doesn't hold up.
The projection Intel made is based upon the assumption that the market for PC chips will decline by about 5% during 2015. Intel revised down its revenue forecast for the year from about $58.67 billion to $55.7 billion as a result of its lowered forecast for PC chip sales.
To put this into perspective, Intel's PC Client Group generated $34.67 billion in revenue last year. A roughly $3 billion decline (the difference between Intel's prior full-year guide and current full-year guide) would suggest an approximately 8.65% year-over-year drop.
Considering that Intel thinks the overall market for PC processor units will drop about 5% this year, and given that it had previously talked about average selling price declines, the current guidance seems quite reasonable.
Where's the risk, then?
As long as the PC market sees unit declines of just 5%, and if the average selling price erosion Intel executives talked about remains manageable, then there doesn't look to be much risk to Intel's full-year revenue or earnings per share guidance.
I would, however, expect Intel to reduce its full-year guidance if the PC market as a whole declines by more than 5% for the year.
I'm not panicking
If the Citigroup analyst had cited "supply chain checks" that suggested PC demand would be worse than the roughly 5% unit decline Intel is talking about, that could be a reason for Intel investors to be concerned.
However, simply saying that Intel is calling for high sequential growth in the second half of 2015 off of what is a very depressed first half of 2015 due to the inventory situation and Windows 10 isn't enough to worry me.