What's next for Intel?

In this Q&A, a leading tech guru reviews the chipmaker's lowered guidance.

By TheStockAdvisors Dec 13, 2011 10:08AM
Angel Muniz/JupiterimagesBy Paul McWilliams, Next Inning

Intel (INTC) lowered its fourth quarter guidance from its original range of $14.2 billion to $15.2 billion to a range of $13.4 to $14.0. At the midpoint, this represents a 6.8% lower forecast.

However, the chip maker stated very clearly this lower forecast is solely attributable to the shortage of hard disk drives (HDD), and is not at all related to the demand for its products. With that, let's address some of the questions I've received from investors.

Why did it take INTC so long to lower guidance?
This is a "rolling" event. When the flooding hit the HDD plants and the piece parts supply channel in Thailand, participants in the HDD secto had to quantify the damage, determine its impact on capacity, and estimate the recovery cycle.

This had to be done at not only an aggregate level, but also at a product by product level. This simply took time and, to some degree, has been a dynamic process as the various companies worked through the situation.

The initial reactions from HDD manufacturers provided us with a public picture that was couched towards the worst case scenario. (Given the litigious atmosphere in which we all operate, the only logical course was to go with the worst case up front.)

However, as HDD manufacturers went through the detailed quantification process we learned the situation was not quite as bad as it was originally communicated. It's still bad - just not as bad.

Once HDD manufacturers quantified capacity, and the forward supply channel quantified its inventory, PC manufactures began to get a clear picture of HDD allocation.

According to INTC this picture began to come into focus in late November to early December and, with that, PC manufacturers have adjusted scheduling with INTC.

What will be the impact from HDD shortages on Q1 2012 shipments?
Specifically, will the impact from HDD shortages weigh on Q1 2012 shipments more than they are Q4 shipments?

The short answer here is most likely yes. During Q4 PC manufacturers depleted supply channel inventory.

With the inventory buffer now gone, the lower manufacturing capacity that was available during Q4 will flow into the channel.

In other words, while PC manufacturing capability was above HDD capacity during Q4, it will most likely be aligned with HDD capacity in Q1. What we don't know for sure is exactly what that HDD capacity will be.

Do you see any demand factors weighing on the PC industry?
According to INTC, the answer here is no. The company sees this as strictly a supply issue, which implies that while PC shipments are stunted by HDD shortages there will be building pent up demand.

I believe this is a logical way to look at the situation, and if it proves to be the case, once HDD capacity is restored we'll see PC shipments move from below trend to above trend.

In other words, pent-up demand will be released once supply problems are solved. According to INTC this should begin to happen late in Q2 2012.

Do you see this slowing the introduction of new INTC chips?
According to INTC, no. I don't see why INTC would slow the introduction of new chips for either the PC or the server markets.

This is a major refresh for INTC and if HDD shortages linger it will allow PC and server manufactures shift the mix to the new and more profitable models.

Do you think INTC is a buy here?
I don't think there are any one size fits all answers for investors - all of us have our own unique personal goals, strategies, and risk boundaries. That aside, I think INTC merits consideration as a potential strategic investment.

While I think INTC will be negatively impacted during most of the first half of 2012, I believe the company is executing at the top of its game and once Wall Street can more fully define the point in time PC shipments can keep pace with demand, we'll see the price of INTC rebound.

That said, we continue to face mostly near-term risks that could drive prices lower before they rebound.

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