Intel Earnings What We’ve Been Expecting

By William Trent, CFA of Stock Market Beat

Intel (INTC) shares dropped after market hours when the company reported strong revenue but weak margins, and guided for more of the same. Intel profit drops 39% as price cuts hurt margins – MarketWatch:

Intel’s gross profit margin, a key measure of profitability, narrowed sharply to 49.6% of sales, from 61.8%. The company has been hurt by stiffer competition from AMD, increased inventory levels and higher start-up costs for new factories using cutting-edge chip manufacturing processes.Intel forecast its gross margin will be around 49% in the first quarter and be around 50% for all of 2007.

Far from being surprising, this is pretty much the expected result of the capacity glut we have seen building for the past year.  Intel and AMD were the first victims because of generally weak PC sales and growing rivalry between the firms. Next to go was wireless, which is still in the process of cracking up. Finally, memory has been a strong point but the signs that it will follow suit have been building.

The good news is, a little more scrubbing of the share prices and a little more discipline on the part of the chipmakers can set things up for positive stock moves shortly thereafter.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Nasdaq 100 (QQQQ) put options; FedEx (FDX) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Starbucks (SBUX) call options; Landstar (LSTR) put options; Ceradyne (CRDN) put options; Dell (DELL) put options; Plantronics (PLT) put options;

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