Will Intel Stock Look Even Better After Q2 Earnings?

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Just when you think it can’t get any worse for semiconductor and chipmaker stocks like Intel (INTC) and Advanced Micro Devices (AMD), it gets worse.

Intel earnings Intel stock INTCLast Thursday, tech-business research outfit Gartner published research suggesting PC shipments fell more than 9% in the second quarter. Intel stock plunged nearly 2% in the wake of the news, closing at its lowest price since June 12 of last year.All told, INTC is down 22% from its peak price seen in December of last year, back when the PC industry didn’t look like it was falling off of a cliff.

It’s that sizeable pullback from Intel stock, however, that may also make the Intel earnings report — slated for after the close on Wednesday — a catalytic event.

Has the worst-case scenario already been priced into the value of INTC shares, or could things be even worse than imagined?

PC Sales Continue to Flounder

Intel isn’t headed into its second-quarter earnings announcement in the most encouraging of circumstances.

As was noted, Gartner reckons worldwide PC shipments fell 9.5% in the second quarter — a figure that more or less aligns with the International Data Corporation’s (IDC) calculations of an 11.8% decline in global PC shipments.

And yes, we’ve already seen the effects of the slowdown take a toll on some of the PC industry’s more prolific names. AMD for instance, warned that Thursday’s Q2 earnings would be even worse than expected. The damage? About an 8% decline on Q1 revenue, according to AMD. And gross margins are now on pace to come in at only 28% versus a previous outlook for Q2 gross margins of 32%.

The explanation? It’s old hat to be sure, but a combination of the advent of cloud computing, tablets, deteriorating economies, and most recently, a free upgrade to the latest operating system — Windows 10 — from Microsoft (MSFT) have all been reasons for consumers as well as corporations to not bother purchasing a new PC.

It’s a problem for anyone who owns Intel stock simply because, despite the company’s efforts to diversify its way out of the liability, PC business still makes up about half of Intel’s total revenue.

It’s not apt to get a lot better anytime soon either.

Although more than a few analysts believe the extraordinary headwinds PC-related companies are facing are finally easing up a bit, few expect the headwind to reverse direction anytime soon.

Cowen and Co’s Timothy Arcuri perhaps had the most optimistic take on things following last week’s report from Gartner, and even Arcuri’s thoughts were far from wildly bullish. He said:

“Despite 1H of each calendar year being seasonally weak, 1H:15 global PC shipment results are 7% below 1H:14 levels and 14% below 2H:14 levels that represents the worst H/H performance in the last 10-years. Notably, CQ2:15 PC units are 400bps below seasonal and have not been this low in aggregate since the depths of the downturn in CQ1:09. The magnitude of the market’s softness is not surprising given AMD’s recent negative pre-announcement and recent data points from Taiwanese ODMs and others in the PC supply chain. We think results have been impacted on rigid OEM inventory management ahead of this month’s Windows 10 launch in addition to ongoing FX-fueled demand headwinds globally. Despite recent softness, we think that results normalize in 2H from back-to-school uplift and some modest benefit from Windows 10 (albeit more of a CQ4 event than CQ3). Our revised PC estimate, -8% Y/Y, assumes a seasonal lift in 2H of +5% that is consistent with prior year levels.”

Most other stances were of the “worse before better” variety.

Intel Earnings Outlook

In that light, the Intel earnings report scheduled for after the close on Wednesday could end up confirming the market’s worst fears, fanning the flames of an already-bearish situation.

As it stands right now, analysts believe Intel will post a profit of 50 cents per share on $13.06 billion in revenue. Earnings at that mark would roll in 9% less than the 55 cents per share of Intel stock the company earned in the same quarter a year earlier, on $13.83 billion in revenue.

The second-quarter results lull is just a reflection of a bigger lull analysts have already factored in. The pros now believe the full-year bottom line will fall from $2.31 per share to $2.10 per share of Intel stock. Revenue is projected to fall from $55.87 billion to $54.82 billion.

And for what it’s worth, Arcuri has lowered his Q3 expectations for Intel — even before Q2’s numbers were posted — underscoring the weakness of the PC rebound on the horizon.

While the top and bottom lines are presently projected to stop shrinking in 2016, the rebound expectations are lackluster to say the least.

Bottom Line for Intel Stock

There’s no denying the PC environment and the rhetoric surrounding semiconductor stocks is miserable. There’s also no denying the performance of INTC stock has been equally miserable. If the company happens to lower its guidance on Wednesday or even later in the third quarter, it could be devastating for Intel stock.

And yet, with a forward-looking price-to-earnings ratio of 12.6 against a backdrop of a nearly 30% tumble over the course of this year, one can’t help but wonder if the worst-case scenario (and then some) has been factored in.

At the very least, Intel stock is worth watching during and after the earnings report for hints that the company isn’t being given enough credit in its quest to sidestep the slow death of the PC. That’s the way research outfit B. Riley & Company sees it anyway, reiterating the opinion that INTC is a buy following the stock’s big pullback.

It is, after all, a dividend-paying cash cow even if it’s not growing leaps and bounds.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/intel-stock-intel-earnings-intc/.

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