I'm sure that more than a few Intel (NASDAQ:INTC) bulls are scratching their heads right now. Despite what looked like an amazing Q4, Intel's truckload of good news earned it nothing more than a 3% haircut the following day.
For the fourth quarter, Intel posted sales and earnings $400 million and $0.10 per share ahead of market estimates, respectively, while its gross margin, at 64.7%, reached an all-time high. What's more, the midpoint of its Q1 2010 revenue guidance range, at $9.7 billion, is also a good $400 million beyond Wall Street's forecast. Why no love from the Street, then?
I think the market had already baked a healthy sales and earnings beat into Intel's stock. Going into the earnings report, shares were up a good 80% from their February lows. Reports of improving consumer spending over the holiday season were easy to find, and IDC and Gartner had respectively reported Q4 annual PC shipment growth of 15.2% and 22.1% -- well above their previous Q4 forecasts. Throw in the start of a product-line refresh, as shipments of chips based on Intel's Nehalem architecture began to ramp up in earnest, and the real surprise would've been if "Chipzilla" didn't deliver an estimate-crushing quarter.
It's also likely, however, that Intel's full-year 2010 gross margin guidance of 61% seems pretty underwhelming, given its Q4 gross margin number. Analysts also predict that 2010 will be a recovery year for enterprise PC sales, which carry a somewhat higher average selling price than consumer systems.
Intel said its gross margin forecast looked lukewarm only because Q4 margins were inflated by an abnormally large mix of high-end Nehalem chips -- both 45-nanometer parts that were already on the market, and newer, 32-nanometer Clarkdale and Arrandale parts announced in January. As cheaper 32-nanometer chips ramp up in earnest this year, margins and selling prices will come back down to Earth.
There's likely some truth to Intel's explanation of things. But it also wouldn't surprise me if Intel's remaining a little cautious about the speed at which the enterprise market recovers. While IDC and Gartner reported great Q4 PC shipment numbers, Dell (NASDAQ:DELL), with its heavy reliance on enterprise customers, was a serious laggard compared with Hewlett-Packard (NYSE:HPQ) and Acer, which are much stronger on the consumer side. And with unemployment in the U.S. and many other developed nations at pretty high levels, and credit markets still a little shaky, a full recovery in business IT spending could take some time.
In the grand scheme of things, Intel's margin decline shouldn't be anything for investors to get too nervous about. The ramp up in mainstream Clarkdale and Arrandale parts, which have a graphics processor built into the same package as a microprocessor, should leave the company in good competitive shape relative to Advanced Micro Devices (NYSE:AMD) in both the desktop and notebook markets. And the positive reviews lauding Microsoft's (NASDAQ:MSFT) Windows 7 bode well for an eventual pickup in enterprise PC buying – even if it doesn't come as quickly as some optimists hope.
Throw in Intel's historical tendency to be conservative in its revenue and margin guidance, and there may still be some good news that the market isn't taking into account here -- even if that good news means the stock will take a breather over the short run.
