It's All Good At Intel Except For The Stock Price

Intel started the tech earnings season with a serious bang, blowing away estimates last week. INTC reported revenue of $11.5B above estimates of $11.37B. They posted earnings of .59 cents per share vs the estimates of .53 cents per share. If you back out some $300MM in tax gains, INTC still beat the street. Like Apple, Intel gave stronger guidance going forward. They are now guiding revenue at $11.5B which is sequentially even with 4th Quarter, this is impressive as 4th quarter is seasonally very strong.

OK. NOW. One would expect INTC stock to rally on these results, and the stock did rally but very modestly the next day and the stock has since drifted lower over the last week or so.

The question is WHY?

Very simply, it cant get any better than this for the Semi King! Intel is already running at full capacity and is running on all cylinders - gross margin wise. This was the thought after Intel blew past estimates last quarter when many were pointing to a cyclical peak in gross margins. When you are at the peak or on top of Mount Everest the only way to go is down unless you are able to cut costs aggressively or sell more into your sales channel. Intel's growth story is in tact and that PC's are not going away anytime soon. The product pipeline is strong on the low and high end. They are seeing growth in emerging markets and the business refresh cycle will drive the PC business through 2011 and into 2012. Tablet, mobile computing, and smart phones will assist INTC as more and more servers will be needed to run cloud based computers.

I ask you again WHY can't the stock rally?

I think the big question is revolving around Intel's plan for capital spending for 2011. INTC announced significant increases in their capital spend through 2011, up to $9B from $5.1B in 2010, this will benefit Applied Materials, KLAC, Lam, and others but many are now worried about over spending and over capacity. Let me be clear. The semiconductor business is a boom bust business, where the down periods are brutal and typically the down periods are followed by periods of over capacity. When more and more fab plants are added to meet demand, once that demand starts to tapper off this industry has problems. Also a problem was the increase in inventory. The Days of Inventory increased from 83 to 94 days.

All an all Intel had a fine report but thoughts  and concerns of over capacity in the semiconductor industry have grounded the stock for the last few months.