What's behind Intel's guidance cut?

The chip-maker attributes an expected revenue shortfall to a shortage of disk drives. But could softening demand be a factor as well?

By Kim Peterson Dec 12, 2011 2:25PM
Intel (INTC) was a big reason stocks were falling Monday. The stock was the biggest loser in the Dow Jones industrials ($INDU), dropping nearly 5% to $23.79 in midday trading.

The company cut its fourth-quarter revenue outlook, saying it now expects revenue somewhere in the range of $13.4 billion to $14 billion, down from $14.2 billion to $15.2 billion. The cut was ostensibly due to shortages of hard disk drives. But is there more to the story?

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The bigger question is whether demand is softening and whether Intel is avoiding the issue by citing a hard drive shortage instead.

"Why does the skeptic in me want to think the $INTC warning is using the hard drive shortage as a convenient scapegoat?" CNBC's Herb Greenberg asked on Twitter.

Many analysts were surprised by the announcement. The questions are coming after Intel's chief executive officer, Stacy Smith, previously said the PC supply chain should be fine in the fourth quarter.

Flooding in Thailand dealt a severe blow to many computer component makers this year. But Smith said in the company's third-quarter conference call that he didn't think the flooding would affect PC market sales in the fourth quarter. "Their combination of alternate supplies and inventory levels will carry us through," he added.

But in its press release Monday, Intel said there was definitely a supply problem. Suppliers worldwide are reducing inventories and microprocessor purchases as a result of hard disk drive supply shortages, the company added. It reiterated that PC sales are expected to be up sequentially in the fourth quarter.

OK, but you have to look at demand here as well -- and Thanksgiving week was not a good sign. PC sales were down 8% year over year that week, NPD Group reported.

While there were several possible reasons, analyst Katy Huberty of Morgan Stanley said the biggest factor was simply weaker consumer demand. "The data so far in November suggest a steady sequential deceleration," she wrote. The one exception was Apple (AAPL), which saw sales soar to a 17% gain from a year earlier.

Gus Richard of Piper Jaffray zeroed in on the demand issue. "Will PC demand be deferred or destroyed? This is the key question," he said in a note, according to Barron's. Intel sees the impact simply as a channel inventory reduction and not a demand problem.

"Given this shortage is occurring during both Chinese New Year and Christmas, we expect some demand destruction as other gifts are substituted for a PC and replaced by a smartphone or tablet," Richard said.

Still, plenty of analysts came out defending Intel on Monday. Tristan Gerra of R.W. Baird thinks Intel overshipped components to PC makers by as much as 15% in the third quarter. "We would be buyers of Intel shares on the weakness," he wrote, according to Barron's.
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