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Why 2012 Could Be Sweet for Intel


It's been a tough year for chip stocks, but 2012 may be a great time to bargain hunt for the best, writes Paul McWilliams of Next Inning Technology Research.


Intel (INTC) lowered its fourth-quarter guidance this month, from its original range of $14.2 billion to $15.2 billion (midpoint $14.7 billion) to a range of $13.4 billion to $14 billion (midpoint $13.7 billion).

At the midpoint, this represents a 6.8% lower forecast and a 4.4% sequential decline from the third quarter, instead of what would have been a 2.8% sequential increase.

Intel stated very clearly that this lower forecast is solely attributable to the shortage of hard disk drives and is not at all related to the demand for its products (not at all related to lower demand for PCs or servers). Intel stated it expects sales of chips into server applications to be aligned with its original guidance.

Intel also stated that PC manufacturers have allocated what hard disk shipments they are getting to higher-end PCs. Therefore, Intel has seen a shift in demand toward its higher-end microprocessors.

With that, let's address some of the questions I've received from readers:

Why did it take Intel so long to lower guidance?
This is a "rolling" event. When the flooding hit the hard disk plants and the piece parts supply channel in Thailand, participants in the hard disk sector (the manufacturers and their suppliers of piece parts) 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 hard disk manufacturers provided us with a public picture that was couched toward the worst-case scenario. These were the public statements hard disk manufacturers had to make to their investors, and given the litigious atmosphere in which we all operate, the only logical course was to go with the worst case up front.

However, as hard disk 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 hard disk manufacturers quantified capacity, and the forward supply channel quantified its inventory, PC manufacturers began to get a clear picture of hard disk allocation. According to Intel, this picture began to come into focus in late November to early December, and with that, PC manufacturers have adjusted scheduling with Intel.

Will the impact from hard disk shortages weigh on first-quarter 2012 shipments more than fourth-quarter shipments?
The short answer here is most likely yes. During the fourth quarter, PC manufacturers depleted supply channel inventory. With the inventory buffer now gone, the lower manufacturing capacity that was available during the fourth quarter will flow into the channel.

In other words, while PC manufacturing capability was above hard disk capacity during the fourth quarter, it will most likely be aligned with hard disk capacity in the first quarter of 2012. What we don't know for sure is exactly what that hard disk capacity will be.

Since hard disk manufacturers shared their early worst-case scenario news, the flow of capacity data has improved. However, in my view, hard disk manufacturers have been cautious as to how much they have raised expectations.

My thinking is that first-quarter capacity will be at least somewhat above what I noted in the aforementioned report, but clearly short of supporting the demand for PCs.

Do you think this will impact Advanced Micro Devices (AMD) more than it will Intel?
The short answer here is again most likely yes. PC manufacturers have shifted the manufacturing mix toward higher-end PCs.

This is only logical. When you can't build all the units you can sell, the only logical alternative is to use the limited supply of hard disks to build the units that yield the highest profit. This means the skew of PC manufacturing has moved toward higher-end processors.

In most markets, AMD-based PCs are sold at lower prices and, most likely, yield lower margins for PC manufacturers. Based on this view, I think it's logical to assume the shift will favor Intel in most end markets.

However, there is one wildcard exception that may work to AMD's favor. As I've outlined in past reports, AMD has executed a very good strategy in China that has provided it with better branding power there than it has in most other markets.

Due to this, and AMD's tight ties with Lenovo, we may see upsides with Lenovo offset what I think are logically downsides with most other brand-name PC manufacturers. However, even if that balances out, it still implies we should expect AMD to lower its guidance, which at the midpoint of +3% sequentially, was similar to Intel's original guidance.

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No positions in stocks mentioned.
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