In a report published on Monday, BlueFin Research Partners (via Barron's) analysts said they expect Intel (INTC +4.36%) to lower its 2015 revenue outlook at its earnings release scheduled for July 15. Although the analysts think the share prices of PC-exposed companies such as Intel reflect "much of the PC weakness," they indicate there could be further downside to already muted PC expectations as a result of a lack of "Back to School demand."
As of writing, Intel shares are down a little over 2%, slightly underperforming the PHLX Semiconductor Sector Index, which is down 1.72%.
Is there more pain ahead for Intel investors, or is the worst over?
It's very tough to call
At this point, it's clear that PC sales haven't been all that great. For example, Micron (MU +4.04%) executives made some comments on the company's recent earnings call suggesting PC build activity has been particularly weak, which led to a decline in Intel's stock price.
Before then, analysts from Goldman Sachs said May sales data from PC ODMs (contract manufacturers) was worse than expected, and that channel inventory levels were "elevated."
Separately, Deutsche Bank's Ross Seymore also indicated that PC sales were worse than expected, and RBC's Amit Daryanani said ODM PC shipments were down 16% month over month in May (far worse than the 12% month-over-month increase seen in May of 2014). Daryanani is calling for an 8% PC unit decline this year.
It seems to be already well known that PC sales haven't been particularly good during the first half of 2015.
What investors should keep an eye out for
Intel plans to report its earnings results for the second quarter and issue guidance for the third quarter of the year on July 15. Since Intel didn't negatively pre-announce, I am inclined to believe the company hit a number close to the midpoint of its revenue/profit expectations for the second quarter of the year.
However, it's what Intel guides to for the full year that I think will weigh most on investors' minds.
At this point, I wouldn't be surprised if the investment community is largely expecting a full-year guide-down, so such a downward revision to full-year guidance might not have the "sting" at this point that it would if slower-than-expected PC sales came as a complete surprise.
That said, the magnitude of any potential guide-down seems likely to be important to Intel investors.
Right now, Intel's guidance calls for flat revenue overall to 2014 levels, with the PC market down "mid-single digits." If the PC market winds up being down 8%, as Daryanani expects, that's between two and three percentage points worse than what Intel has built in to its guidance (assuming the guidance assumes a 5%-6% unit decline).
If we subtract 3% from Intel's 2014 PC Client Group revenue of $34.67 billion, that works out to $1.04 billion in revenue. If we take that off of Intel's current full-year consensus of $55.25 billion, then Intel could revise guidance down to $54.21 billion.
That would represent a decline in sales from 2014 levels, but it would still be better than what the company achieved in 2012 and 2013.
What can Intel do to create value for shareholders?
In light of a still-unhealthy PC market, Intel will need to keep finding new avenues of growth. Intel's data center business is doing quite well and has been effective at offsetting the declines the company has seen in the PC market.
However, I continue to believe Intel needs to find success in the mobile market sooner rather than later. If Intel can capture a meaningful portion of the revenue share to be had in smartphone/tablet platforms, it could at least soften the impact of a weak PC market.
Investors should pay close attention to the long-term growth strategy the company lays out at its Investor Meeting later this year. What kind of long-term growth rate makes sense for the company? When will we start seeing that growth play out?
The answers to these questions are, in my view, critical to trying to get a handle on what Intel shares are truly worth.
