Intel Revenue Outlook Slashed: Is This the Beginning of the End?

The big headline last week from Intel (NASDAQ: INTC) was that it cut its first quarter revenue outlook by $1 billion.
Everyone seems to be freaking out by this announcement, but there are several things going on that need to be parsed before investors run for the exits.
First, the original Intel revenue forecast was for a range of $13.2 billion to $14.2 billion. It was cut to a range of $12.5 billion to $13.1 billion. So revenue may end up missing the original forecast by just a little.
Intel said that demand for desktop computers, particularly for businesses, was weakening. Some of this, though, doesn’t appear to be a permanent issue. The company thinks that businesses are waiting for Microsoft (NASDAQ: MSFT) to upgrade Windows before they spend on new desktops.
This, of course, influences inventory, which declines as well. The upside is that when demand picks up again, those inventories need to be replenished, leading to an abnormally large increase in orders and revenue.
However, there’s something larger at play. Investors may disagree as to how it should be viewed, but I view it as the price of doing business. It’s called currency fluctations. It happens.
It’s possible to just adjust one’s numbers on a constant-currency basis to see what’s really happening. But for people to get upset over the strength of the dollar and its effect on earnings is, to me, not a fair way to judge a company’s results.
The one element that is of some concern is how many consumers are moving to laptops and tablets. Other chip makers own that market, and that’s where Intel is falling behind. The desktop isn’t going to vanish, but Intel needs to innovate and move forward in the laptop and tablet market.
The good news is that gross margins are expected to be 58%-62%, which is about normal. All of this, by the way, comes on the heels of rather strong news. Fourth quarter income increased 39%, with 3% revenue increases in Intel’s PC client group and a 25% increase in the company’s newer data center products.
And let’s keep all of this in perspective.
Intel is a mature company, one that Peter Lynch might call a “stalwart.” Its revenue and earnings are not growing in a straight line anymore. It is subject to some disruptive changes in the computing industry.
Despite all this, missing revenue estimates by $1 billion when it generated $55.8 billion last year is hardly the end of the world.
Meanwhile, Intel generated $11.7 billion in net income in fiscal year 2014, on top of $9.6 billion in FY13 and $11 billion in FY12.
FY12 free cash flow was $7.8 billion. It then rose to $10 billion in FY13 and $10.3 billion in FY14.
Boo hoo.
Meanwhile, the company pays out 40% of that FCF as a 3.1% dividend. It also has $23 billion in cash and only $12 billion in debt.
There is just no way that Intel’s empire is going to come crashing down. There are worse things you can do than buy Intel.

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