Intel Chipped By Shrinking Demand

Intel (NASDAQ: INTC ), the worlds largest maker of semiconductors, shocked the
Street in early December by announcing that its fourth-quarter revenues will
miss expectations by $1 billion. That was a 7% staggering shortfall from what
the company previously expected to make during the quarter. Shares shed 4% as a
result. The biggest culprit, according to execs in a conference call, was the
flooding this summer in Thailand , where more than 40% of the worlds computer
hard drives are manufactured. Investors were not very impressed with this dog
ate my homework kind of excuse. Is it really possible that a natural disaster in
Thailand is the lone reason for lowered expectations at Intel? Or is it masking
bigger problems in PC sales? I vote for a little of both. Thailand experienced
severe monsoons in July, and flooding continues to plague the region. The World
Bank has ranked this disaster as the worlds fourth costliest ever, and it has
been described by some as the worst flooding in history notwithstanding the
flood Noah had to navigate in a floating zoo with 13 million people affected.
The floods have halted factory production to the extent that analysts expected
hard drive shortages for at least the next six months, with severe damage to the
operations of companies like Western Digital (NYSE: WDC ). IHS iSuppli slashed
its estimates of first-quarter computer shipment growth by 28%. So how does this
affect Intel? Well, the company supplies chips for the vast majority of the
worlds computers. So if computers cant be built because of the hard disk
shortage, fewer chips are needed, too. That makes sense. Yet it was not long ago
that Intel crushed analyst expectations and reported stellar operating results,
with net income rising 17% and revenues up 29% from a year ago. Chief executive
Paul Otellini credited it to stronger sales of processors for laptop computers
and servers and the company has made big strides in mobile computing, where it
has lagged for years. Why the delay in reporting trouble from Thailand after so
many peers already have confessed shortfalls? Intel executives blamed the
efficiency of their supply chain, with orders only dropping off in recent weeks.
The big hard-disk drive manufacturers had given their statement of supply on a
customer-by-customer basis and then we saw a quick dropping off of backlog as
customers aligned the purchase of microprocessors with future shipments of HDDs,
chief financial officer Stacy Smith said. However, there have been several
indications that PC sales were beginning to slow down independent of the
flood-spurred supply shortage. An analyst with Ticonderoga Securities said his
measure of demand at 13 leading Taiwan-based manufacturers already was tracking
lower before the Thai troubles came into view. He said last month represented
the second weakest November on record, a touch behind 2008. Another analyst
noted that consumers are hanging onto their existing computers longer and that
U.S. and European markets are on the verge of contracting a new development for
markets that have expanded for decades. The fact that Intel is reporting
weakness in the fourth quarter also points to possible problems beyond just
supply constraints. Most industry analysts believe the tight component supply
wont likely affect computer sales until the first quarter of next year, as a
large part of PC production for this quarter already has taken place. We will
get more insight when Intel reports actual fourth-quarter results next month, so
consider the health of the chip-makers shares from here on out to be a proxy for
investors view on tech demand under the constraints of global industrial
contraction. Intel is a very good company that makes important products, but its
unlikely it can buck the tide. Jon Markman operates the investment firm Markman
Capital Insights .