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What's galling to investors is that Intel [INTC
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] re-affirmed its outlook just a few weeks ago when it reported earnings, despite a report from market research firm iSuppli several weeks ago that detailed a steep decline in flash memory prices.
Which is precisely the sector of Intel's business responsible for the margin outlook revision. While I have some issues with Intel's apparent lack of visibility into its own financial expectations, I want to take a step back and examine whether this news is as bad for broader tech as we might think.
No question the news hurts Intel, as well as any of the other major players in flash memory, including Sandisk [SNDK
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] , Micron [MU
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] and Spansion [SPSN
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] . The news could send ripples through the broader semiconductor industry, affecting companies like Advanced Micro Devices [AMD
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] as well as kind of collateral damage.
Yet one company's bad news might mean margin expansion for the companies with which it does business. NAND flash memory prices are falling because of both a glut of chips on the market--a regular occurrence in this boom/bust cycle of the sector, and the possibility that devices like digital cameras might not have sold as well during the holiday shopping season as some might have hoped. But the fact is this: key flash memory customers continue to do just fine, thank you very much, and lower flash memory prices from the supplier means fatter margins for them and their products.
Hewlett-Packard's [HPQ
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] Mark Hurd just re-affirmed his company's guidance last week, saying he's very comfortable with his outlook. Same goes for Apple Inc. [AAPL
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] , which just last week re-affirmed iPhone sales guidance for the rest of the year, and said there's no ceiling in sight for Mac's momentum. The company was even optimistic about iPod which has seen its fair share of "saturation" headlines.
Some will say that flash memory prices are falling because of the glut on the market. And the glut on the market comes from slackening consumer demand and not over-production. But ask HP; ask Apple. Sheesh, ask Dell [DELL
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] , for that matter. Some products, like digital cameras and GPS devices, may see slackening demand, but that doesn't mean there aren't some key companies that will enjoy the benefits of dramatically falling flash memory prices. Believe me when I say I'm not telling you to throw money wildly at all things tech. This is very much a stock-pickers market setting up perfectly for investors who have a time horizon longer than lunch time later today.
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And one other point about Intel's "warning." I don't want to underestimate the seriousness of the margin decline. It's bad. It's disappointing. It's a problem. No less than a dozen brokerages lowered earnings estimates on the news. Some analysts are even expecting yet another warning from Intel as the quarter draws to a close in the next few weeks thanks to better visibility into a weakening PC supply chain, and they're lowering estimates accordingly.
That's a good strategy. I'm tempted to say that Intel's decision to lower margins, but stick with the rest of its original guidance on the quarter, might mitigate just how bad this news really is. But then again, it was just a few weeks ago that it re-affirmed margins and look where we are today. And who's to say what will happen tomorrow!
Intel's confusion aside, its flash news could indeed be good for HP and Apple.
Questions? Comments?
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