Intel’s strong 2Q11

the results

INTC reported 2Q11 results after the close of trading in New York yesterday.  The company posted earnings per share of $.59, up 16% year on year, on revenue of $13.1 billion, a 22% gain vs. 2Q10.  The revenue number was an all-time high for INTC, thought it was helped along by the recent acquisitions of McAfee and of some chip businesses from Infineon.  Earnings handily beat the analyst consensus of $.51.


INTC typically doesn’t talk about future eps.  The company expects that 2H11 will show its normal seasonal strength vs. 1H, and that revenues over the period will likely be up by around 25% vs. 2H10.  This seems to me to suggest full-year 2011 eps of $2.50 or so.  INTC expects 2012 will be considerably better than 2011.

The mix of revenues will be different from what INTC thought three months ago, however.  More about this below.


Demand from emerging markets, which makes up the majority of INTC’s business, is booming.

Corporations around the world continue to spend heavily on new servers.  The development of cloud computing is adding to that.

The global consumer appetite for notebooks and desktops, with demand skewed toward the emerging world, is growing at double digits.

INTC saw some weakening of its business in Japan.

The corporate tax rate for the quarter was lower than anticipated, signalling that a greater proportion of its revenues than the company expected are coming from outside the US and EU.

The only fly in the ointment for INTC is netbooks.  Sales of the Atom chips which power them have swung from being up 4% year on year in 1Q11 to being down 15% year on year in 2Q11.

a lower PC unit growth forecast for 2011

Predictably, this is the one thing from the INTC earnings release and conference call that the press has seized on.

Third-party consultants have been saying for some time that they expect growth in global PC unit sales this year to by only about 5%.  INTC, in contrast, has been saying that it expects “low double digit” growth (10%-12%?).

The difference?  INTC says, in effect, that the consultants only have good information about the developed world.  They’re incorrectly extrapolating weakness there to the emerging markets, where conditions are far better.

None of that has changed.  What has taken INTC by surprise is a recent falloff in sales of Atom chips that go into netbooks.  It sounds to me that there’s worse in store for Atom than the 2Q11 sales drop cited above.  That’s  because Atom is the reason INTC is lowering its global PC unit growth forecast by about 2%, to up 8%-10%.

On the other hand, people still buying PCs are selecting higher priced ( and higher profit) chips than INTC thought.  The two factors are cancelling each other out on the revenue line.

my thoughts

They haven’t changed since my last post on INTC.  I was a little surprised, when I looked at a year to date chart a couple of minutes ago and saw that INTC has outperformed the S&P during 2011 (based on price action in July)On a one year view, INTC is a substantial laggard, though.

The bearish case, as I understand it, is that INTC is a child of the PC generation.  That time is past; INTC has been displaced by ARMH in the new tablet/cellphone era.  Therefore, no matter how good earnings are today, they will inevitably decline.  And, as these situations typically develop, the falloff will be sooner than you think and very rapid.

An implicit assumption is that INTC will be unable to adjust.

The bullish case is a little more complicated.  It’s that:

–servers for general corporate needs and for cloud computing will remain booming businesses

–corporate users and consumers in the developing world will ensure that the traditional PC business will be at least stable, and won’t decline precipitously

–at 9x 2011 eps ( and 8x? 2012), and with a dividend yield higher than a ten-year Treasury, all but the most bearish outcome is already baked into the INTC stock price

–it’s possible that some combination of INTC’s chip innovation and the success of MSFT products in the cellphone and tablet markets will enable INTC to transition its consumer business in the developed world to the post-PC era.

I own INTC; I’m in the bullish camp; but I’m somewhat concerned that I’m simply tuning out the (negative) message that the stock price has been sending out for a long time.  I still think, however, that if the developed markets consumer business disappeared tonight and tomorrow INTC appeared as a fast-growing cloud computing and emerging markets play the stock would be a lot higher than it is now.  So for now I’m content to wait.

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