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Wednesday, January 16, 2008

Intel Q4:2007 results

Intel reported in-line revenue and earnings and guided 300 million below analyst consensus of 10 billion for next quarter. The stock came unglued after hours, trading down over 10%.

When pressed on the conference call, the company was adamant that they were not seeing double ordering, that the weakness was not in the processor or motherboard business. They saw no pronounced weakness in the consumer PC business. They blamed the weakness on flash memory, both NAND and NOR. As Micron is their co-producer of NAND, it should come as no shock that after Micron’s lackluster results some weakness would have passed through to Intel. NOR is and always has been a fab filler business. Intel was hoping to dump their NOR assets into an STM joint venture but that’s taking much longer than expected. Gross margins were better than expected and guided higher than consensus but it was not enough to offset the lower revenue guidance in terms of profits. Consensus earnings estimates are coming down to roughly $1.40 for 2008. This reduction plus the 10% decline pre-opening decline puts Intel at roughly 14* earnings estimates, it’s multiple is twice its forecasted growth rate… still expensive relative to the growth but cheap relative to its historical valuation. Corporate profits in general are under pressure and that tends to lead to IT spending reductions – we could certainly see PC upgrades slow and it doesn’t appear that Intel is forecasting a slowdown in the economy into their guidance, so that tempers my enthusiasm for the shares.

NAND pricing has been terrible all quarter, and finished near the lows. Ultimately NAND weakness is a good thing for the portability portent. NAND is non-mechanical high capacity memory. It’s small, light, requires little power and because its non-mechanical its equipment failure rate is lower than traditional head-based hard drives. NAND represents an enormous threat to the classical hard drive businesses of Seagate and Western Digital in that the cheaper it gets, the more it emphasizes the short-comings of mechanical drives. Once you get 80gb NAND drives for under $100, the traditional hard drive business will begin to erode rapidly.

Typically, “the news” in Intel often represents a near-term reversal for the semiconductor index. If there’s other companies you’re looking to buy, this morning might be a good entry point. I would buy some Apple personally.

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