Microchip giant Intel (INTC) has been taken for a rollercoaster pricing ride in the start of 2008. Fear of worsening economic conditions has pushed down the price of Intel by more than 25% during January 2008 thus far.
Intel’s 52 week high of $27.99 fell to the dramatic lows of $18.05, as investors scrambled to protect their portfolios from the fears surrounding 2008’s economy. However, the steep fall appears to be more the outcome of a perception, rather than any real weakening of the internal strength of this stock.
The stock was hammered soon after its quarterly results and update on January 15, 2008. Interestingly, the drop in price was proportionally significant for a stock like Intel – and it seems to have occurred without strong, underlying fundamental reasoning.
Reasons behind the steep price fall
The two main reasons for Intel’s steep fall were the future guidance provided by Intel, as well as the current economic conditions that have put investors into an uncertain frenzy.
Although Intel’s fourth quarter revenues grew 10% in year-to-year comparisons, it still reported a revenue shortfall of $100 million less than expectations – which were in stark contrast to the significant over-performance of its 3rd quarter expectations. Coupled with its precautionary outlook for 2008, Intel’s shares plummeted amidst fears of softening hardware sales.
Secondly, as the market continues to be hit with news of economic woes, prospects (at least for the short-term) for Intel are not considered to be lucrative. Many investors believe that technology stocks are the first casualties of any downturn in an economy, especially for semiconductor suppliers like Intel.
Intel’s underlying factors of strength
Though Intel was cautionary in its 2008 outlook, there were no indications of an expected softening of chip sales. In fact, the chipmaker expects to experience robust demand for processors and chipsets, as they remain confident in the consistent levels of PC sales. In addition, they expect that any shortfall in revenues in the United States will be offset by other markets, notably the emerging global markets.
Indeed, Intel’s 2008 operating income shows continued growth. With a record operating income of $8.2 billion in 2007, which was up 45% in a year-to-year comparison, Intel appears poised for continued growth – especially in overseas markets. In fact, in 2007, Intel hit its historical records for microprocessor and chipsets, both in terms of revenues and units sold.
The shortfall in Intel’s fourth quarter earnings stemmed from flash memory chips. With an excess supply of flash memory chips in the market, other suppliers have also experienced underperformance in this product. Indeed, the flash memory chips are the main culprit behind Intel’s cautionary guidance, while its other products remain strong.
Besides the expected shortfall in flash memory chips, there is no other factor expected to negatively impact the revenue of the company.
2008 prospects for Intel
Intel has stated that their demand will remain strong during 2008, maintaining that the demand for PCs and other electronics fueled with its chips will continue to remain high. These expectations have been confirmed by many large players in the industry, most notably Microsoft (MSFT), who expects PC sales to rise by 11% to 12% in 2008.
In addition, despite the recessionary indicators plaguing the US economy, 75% of Intel’s revenues stem from other countries – and indeed, in the last years, record growth has been precipitated outside of US borders. In view of the prevailing conditions, any loss in the US market will be compensated for in other countries, meaning that Intel’s revenues should not experience any significant downfall in 2008.
Keeping Intel inside your portfolio
The current meltdown in Intel’s stock proves to be an excellent opportunity to acquire one of the market’s favorite blue chips – at clearance rates. The current panic in the market put short-term blinders on investors, meaning that a savvy investor can pick up a great stock for a low price. In this case, the chip maker’s consistent performance, dividend income, and projected international growth may be sufficient reason to keep Intel inside your portfolio.