When, on Tuesday, Intel (NASDAQ:INTC) announced better-than-expected sales and per-share earnings of $8.7 billion and $0.27, respectively, I thought investors would cheer. But they haven't; the stock trades for almost exactly what it did as of Tuesday's close.

What's the problem? Where are the coattails of the Dow at 12,000? And where, for that matter, is the credit for punishing rival Advanced Micro Devices (NYSE:AMD), which saw its gross margin decline by more than 5% thanks to a brutal price war? (AMD's shares are off more than 10% as I write.)

Perhaps it's because the news from Intel isn't really as good as exceeding the imaginary benchmark that so often is Wall Street's "projections." The stark reality is that inventory is still very much a problem for the chip maker, and it seems to be getting worse. Consider the data in the table below, which shows sequential growth in raw materials, work in progress, and finished goods inventory and then compares that to sales growth over the same periods:


Raw materials

Work in progress

Fin-ished goods


Q3 2006





Q2 2006





Q1 2006





Source: Intel, Capital IQ

See the problem? In each of the past three quarters, Intel's finished goods inventory has risen faster -- often far faster -- than raw materials. And the latest quarter shows a sequential decline in product being built and a surge in product available for sale. That at least raises the possibility that the price war Intel initiated isn't having the inventory-clearing effect some had hoped would occur.

Sales, too, have failed to keep pace with finished goods over the past three quarters, though the gap shrunk considerably in the most recent quarter. Perhaps that's a sign that better days are still to come?

I'd love to believe that. And there's certainly an argument that demand heading into the holiday season dictates a higher level of inventory. But a 59% year-over-year increase? Color me skeptical.

If there's good news to be had in all this, it's that everyone I know expects blockbuster holiday sales of Intel- and AMD-powered PCs, which suggests Intel's shares are already optimistically priced over the short term. If so, Fools may have time for another chapter (i.e., quarter) to unfold before buying the book on Intel's rapidly deteriorating inventory story. Let's hope that's the case; this cliffhanger is getting old.

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Though Fool contributor Tim Beyers likes to read thrillers, he'll leave stock market thrillers to braver souls. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what stocks are in his portfolio by checking Tim's Fool profile. The Motley Fool's disclosure policy doesn't have a chip on its shoulder.