There's a skunk in the numbers. Semiconductor giant Intel Corp. exceeded analysts' revenue and profit estimates for the third quarter and so did rival Advanced Micro Devices Inc. We should be celebrating, right?
Something doesn't sit right here, in the numbers, in the expectations for the fourth quarter, in the overall market condition, consumer sentiments, finance environment, the entire economy and especially what this means for 2008. I could go on.
I think Intel's and AMD's robust results might send the wrong signals to the information technology sector. First, I believe the two companies and others in the sector benefited from higher than expected third quarter orders that should have come in during the fourth quarter.
There's nothing to prove this, just a feeling that many customers moved forward their end-of-year orders for reasons that are not that clear yet.
There are plenty of other factors to consider, however, if intuition seems too subjective. Here are my concerns:
The equity market is erratic (soars one day and swoons the next), the dollar is catering against the world's major currencies—heck, the Canadian dollar is stronger now than the U.S. currency and the Euro is kicking the dollar back into the Middle Ages.
What's more, oil prices are shooting for the skies—sucking up disposable income—the housing market has stalled, drying up markets for home refinancing, second mortgage (bye bye summer home, winter home, rental property, flip home, etc.) and home equity line of credit.
Interest rates charged on credit cards and store cards are at highest levels in years (despite the recent action by the Federal Reserve), which means disposable income will go towards paying off debts rather than on new purchases.
In this environment, one would expect high-tech executives to be cautious. Nay. Andy Bryant, Intel's newly appointed chief administration officer (formerly CFO)—more on this appointment in a subsequent blog—wished he had more inventory going into the fourth quarter. Bryant sees robust fourth quarter sales for Intel and wants to make sure the company can meet this demand.
That's fine except for the conditions mentioned already above. They will impact consumer spending. They will hurt capital expenditure. They will eventually hurt any company holding excess inventory.
A missed sale probably can't be reeled back so Bryant and Intel might be right in insisting upon higher inventory stocks. And my fears might not be realized in the fourth quarter either, though I suspect end-of-year or December holiday sales won't be as robust as many are expecting.
Watch out for the first half of 2008. If I was taking a position in today's market, I probably won't short Intel's stock because the company has an efficient manufacturing process in place and its product line is far ahead of rivals.
I would be on the lookout, however, for companies that might not have as robust a product offering, companies that don't have an easily defensible position, those that are expanding production in expectations of high end-of-year sales, those that suffer from terribly low margins and the ones which lack enough cash to withstand an inventory nightmare.
Demand might have been strong in the third quarter as Intel and AMD have shown but a little paranoia about the future could safe your skin.