Intel's Recovery a Sign of the Tech Times

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Intel

Call it a perfect storm of economic trends for Intel, and the company is grabbing its surfboard, ready for what could be the recovery ride of its life.

The company will report its fourth quarter after the bell tonight, and there's every indication that Intel will be able to beat the Street's consensus of 30 cents a share on $10.2 billion, though BofA warned just yesterday that there's a chance Intel might miss on the top line. As I wrote earlier in the week,it's really not a question of whether Intel beats tonight, but by how much. WhisperNumber says the number will be 33 cents with the vast majority of its polled investors, 90 percent, anticipating the company to offer a "positive outlook."

That perfect storm is key: enterprise spending is on the rise thanks in large part to the Microsoft Windows 7 upgrade cycle; China is back in the picture (maybe not for media/internet companies like Google?!) as a key buyer of PCs and Intel microprocessors; netbook sales continue to be strong; PC sales, up a surprising 3 percent in 2009, should increase 12 percent this year, or so says Gartner. Just yesterday, IDC announced a surge in global PC sales during the fourth quarter.

Intel spent $7 billion on a new domestic manufacturing initiative which means it'll have the capacity in place a year from now when markets really heat up, as opposed to scrambling for capacity and chasing all that anticipated demand. Smartphones continue to rule the tech roost and Intel will be out with its mobile offering late this year or early next. (Sure, Qualcomm isn't sitting still, but Intel doesn't enter markets unless it can sell hundreds of millions of something, so even though it's a Johnny-come-lately to mobile, it still anticipates some pretty broad success there.

Investors are also riding this microprocessor recovery wave: Intel shares jumped 8 percent during the holidays, 30 percent over the last six months. But much of that increase was driven by consumers snapping up new PCs. Now that the enterprise is jumping into the buying game, Intel's prospects may actually accelerate.

The real metric by which to measure Intel is the company's gross margin.

Tonight, that number should swell to a staggering 62 percent, up substantially from the 53 percent Intel reported during the same period a year ago. What borders on the remarkable is that Intel can increase its margins even as the PC industry transitions to far lower cost, and far lower margined netbooks. Intel's Atom microprocessor has been a boon on that front with Intel offering low-cost chips, but still enjoying high margins on them. In fact, depending on what the company reports tonight, Intel could be on track to report its highest annual gross margins ever.

Intel's report tonight will ripple through broader tech, both big and small cap.

The company is such a bellwether that its likely Texas Instruments, Qualcomm, Applied Materials, Hewlett-Packard, Microsoft, even Apple will feel the effects of this report. But longer term, into the calendar second and third quarters, will Intel's guidance keep the momentum alive, or is this a one-quarter recovery? In other words, how long will PC and consumer electronics sales continue to sustain the broader economic recovery? That's why Intel's guidance, and those pesky conference call tea leaves are so tremendously important tonight.

Wildcards? Intel still finds itself with a red, laser, anti-trust dot on its forehead, with ongoing cases that could cost the company billions more than the $1.25 billion its already paid AMD to settle longstanding charges of bad marketplace behavior. There was Intel's abandoning of its graphics chip, which might help satisfy ongoing charges by rival nVidia (though the rhetoric from nVidia remains just as nasty as it always has.)

But those cases are longer term issues for later this year. In the present, with tonight's earnings, and with economic recovery upon us — and Intel at the center of that perfect storm — this company is singin' in the rain.

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