Market Overview

Is There a Good Excuse to Explain Intel's 4Q Revenue Miss?

Intel (NASDAQ: INTC) is blaming it on a shortage of hard disk drives. But is that an accurate assessment?

While Intel has had a decent (but fluctuating) year, other corporations within the semiconductor industry – including Advanced Micro Devices (NYSE: AMD) and NVIDIA (NASDAQ: NVDA) – have endured significant declines.

At the year's onset, AMD traded well above $8. By January 10, the stock had risen to $9.19 – roughly a dollar shy of its two-year high, but well above its three-year low of $2.27. By the end of January, AMD dropped below $8 but quickly recovered in the following month, jumping to $9.44 on February 17. The stock held steady in the coming days before a few declines during the spring. However, it wasn't until June that AMD really began to take a hit. Since then, the stock has seen only marginal gains. By July 15, AMD was trading at $6.43. One week later, the stock rose to $7.75. That gain was short-lived, however, as the stock tumbled back down to the $6 range in the following days. Currently, AMD is trading a dollar lower.

Similarly, NVIDIA started the year with a bang, soaring from $15.82 on January 3 to $20.63 on January 10. Ten days later, the stock traded roughly two dollars higher. By February 2, NVIDIA was trading at $25.58.

The stock peaked on February 17, trading at $25.68, which marked the end of NVIDIA's fun. From then on, the company began to decline. By August, NVIDIA shares had lost 50% of their value. The stock has since struggled to regain its potency, rising to $15.50 on September 15 before declining back to the $12 range in October. Most recently, NVIDIA has fluctuated between $14 and $15, spiking to $15.82 on December 1.

If what Intel said is true, could the decline in these other semiconductor companies have anything to do with the hard drive shortage? Perhaps. But as their stock performance shows, AMD and NVIDIA have been in trouble for quite some time. And they aren't the only ones: Rambus (NASDAQ: RMBS), Micron Technology (NASDAQ: MU) and Applied Materials (NASDAQ: AMAT) have also been struggling.

SanDisk (NASDAQ: SNDK), which is mostly known for producing memory sticks and memory cards, is one of the few companies that has been able to overcome the industry's summer and fall declines. SanDisk started the year in the $50 range, lost more than 40% of its value by August, and soared to a new year high of $53.38 on October 28.

But while the aforementioned companies have all faced significant declines on at least one occasion this year, Intel has managed to keep its head above water. The company started the year in the low $20s and, despite a handful of significant fluctuations, never dipped below $19. That level of stability might be one of the reasons why investors are more confident in Intel's future than other chip manufacturers. The company also produces the most well-known processors in the United States. Marketing muscle, consumer awareness and acceptance, and supplier support (not even Apple (NASDAQ: AAPL) could resist Intel's dual- and quad-core processors) have also played a role in Intel's success.

Where does this leave Intel, which announced today that it will fail to meet 4Q revenue expectations? Sales of PCs are expected to rise in the fourth quarter, but the supply chain is apparently reducing inventories and microprocessor purchases “as a result of hard disk drive supply shortages.” According to the company release, Intel “expects fourth-quarter revenue to be $13.7 billion, plus or minus $300 million, on both a GAAP and non-GAAP basis, lower than the previous expectation of $14.7 billion, plus or minus $500 million.”

During a conference this morning, Intel CFO Stacy J. Smith said that the demand for servers and PCs is “healthy and growing.” He said that Intel's hard drive shortfall is “quote broad” across PC customers, and that the company expects to see higher demand for solid-state drives.

Hard drive manufacturers, particularly Western Digital (NYSE: WDC), have been suffering ever since Thailand was hit by major floods this year. Thailand is the world's second-largest producer of hard drive, and it just happens to be the country where Western Digital's factories reside. When the floods hit, Western Digital was forced to close at least one of its factories. Contrary to Google's (NASDAQ: GOOG) hopes and dreams, computers can't exist without a hard drive. Thus, chip manufacturers may have a very good excuse for any and all revenue declines that occur in the near future.

While this might seem a little too convenient for Intel and any other company that wishes to jump on the hard drive supply shortage bandwagon (try saying that five times fast!), it's important to remember that Intel's sales are not immediately tied to today's PC purchases. The Dell (NASDAQ: DELL) that you buy for Christmas will have an Intel processor that was manufactured a while ago. Thus, the sale of that processor likely counted toward a previous quarter, even though the resulting computer was not sold to you until this quarter.

Going forward, Intel will likely maintain its position as the leader of computer processors. AMD, however, seems to be losing its quality edge. There was a time when many consumers believed that AMD produced a better (and cheaper) processor. Nowadays, their processors are more often perceived to be a cheaper alternative, but not necessarily a superior product.

NVIDIA's biggest problem is that 3D graphics cards – the company's specialty – are becoming less relevant, thanks in part to faster core processors. While it is wholly possible that Sony (NYSE: SNE) and Microsoft (NASDAQ: MSFT) may use NVIDIA graphics cards in their upcoming consoles (the unofficially titled PlayStation 4 and Xbox 720, respectively), NVIDIA will need more than the game industry's support to survive.

ACTION ITEMS:

Bullish:

If you believe the comments of Intel's CFO and think that solid-state drives are the future, consider the following:

  • In addition to Intel, OCZ Technology Group (NASDAQ: OCZ) is one of the primary (read: overly hyped) makers of solid-state drives.
  • Seagate (NASDAQ: STX), Western Digital and SanDisk all manufacture solid-state drives as well.

Bearish:

If you're inclined to believe that the future of computing is in the cloud, not in solid-state drives, consider these alternatives:

  • Google would love for every one of us to sell our Windows PCs and MacBook Pros and buy a brand-new, hard drive-free Chromebook.
  • While Apple would hate for that to happen, the company isn't shying away from the cloud, as evidenced by iCloud.
  • Microsoft (NASADQ: MSFT) has a whole other approach, but it would also love for consumers to jump in the cloud (so long as it's a Microsoft-related cloud that consumers jump into).

Follow me @LouisBedigian

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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