by Jon Markman | December 23, 2011 6:00 am
Intel (NASDAQ:INTC), the world’s largest maker of semiconductors, shocked the Street in early December by announcing that its fourth-quarter revenues will miss expectations by $1 billion. That was a 7% staggering shortfall from what the company previously expected to make during the quarter. Shares shed 4% as a result.
The biggest culprit, according to execs in a conference call, was the flooding this summer in Thailand, where more than 40% of the world’s computer hard drives are manufactured.
Investors were not very impressed with this “dog ate my homework” kind of excuse. Is it really possible that a natural disaster in Thailand is the lone reason for lowered expectations at Intel? Or is it masking bigger problems in PC sales?
I vote for a little of both.
Thailand experienced severe monsoons in July, and flooding continues to plague the region. The World Bank has ranked this disaster as the world’s fourth costliest ever, and it has been described by some as the worst flooding in history — notwithstanding the flood Noah had to navigate in a floating zoo — with 13 million people affected.
The floods have halted factory production to the extent that analysts expected hard drive shortages for at least the next six months, with severe damage to the operations of companies like Western Digital (NYSE:WDC). IHS iSuppli slashed its estimates of first-quarter computer shipment growth by 28%.
So how does this affect Intel? Well, the company supplies chips for the vast majority of the world’s computers. So if computers can’t be built because of the hard disk shortage, fewer chips are needed, too. That makes sense.
Yet it was not long ago that Intel crushed analyst expectations and reported stellar operating results, with net income rising 17% and revenues up 29% from a year ago. Chief executive Paul Otellini credited it to stronger sales of processors for laptop computers and servers — and the company has made big strides in mobile computing, where it has lagged for years.
Why the delay in reporting trouble from Thailand after so many peers already have confessed shortfalls?
Intel executives blamed the efficiency of their supply chain, with orders only dropping off in recent weeks. ”The big hard-disk drive manufacturers had given their statement of supply on a customer-by-customer basis and then we saw a quick dropping off of backlog as customers aligned the purchase of microprocessors with future shipments of HDDs,” chief financial officer Stacy Smith said.
However, there have been several indications that PC sales were beginning to slow down independent of the flood-spurred supply shortage.
An analyst with Ticonderoga Securities said his measure of demand at 13 leading Taiwan-based manufacturers already was tracking lower before the Thai troubles came into view. He said last month represented the second weakest November on record, a touch behind 2008. Another analyst noted that consumers are hanging onto their existing computers longer and that U.S. and European markets are on the verge of contracting — a new development for markets that have expanded for decades.
The fact that Intel is reporting weakness in the fourth quarter also points to possible problems beyond just supply constraints. Most industry analysts believe the tight component supply won’t likely affect computer sales until the first quarter of next year, as a large part of PC production for this quarter already has taken place.
We will get more insight when Intel reports actual fourth-quarter results next month, so consider the health of the chip-maker’s shares from here on out to be a proxy for investors’ view on tech demand under the constraints of global industrial contraction. Intel is a very good company that makes important products, but it’s unlikely it can buck the tide.
Jon Markman operates the investment firm Markman Capital Insights. He also writes a daily trading newsletter, Trader’s Advantage, and a long-term investment service, Strategic Advantage.
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