Now's the tough part
Intel blew past estimates, but its real challenge is about to start.
October 15, 2003: 1:39 PM EDT
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) - You get the feeling that even Intel executives were surprised by the strength of their company's third quarter earnings report.
Earnings topped expectations easily, sales were at the top end of guidance and the company's profit margin exploded. For Intel bears -- and there are still plenty of them out there -- Tuesday was a sleepless night.
Wall Street analysts, of course, are falling all over themselves extolling what a great quarter Intel had and busily upping their estimates for subsequent periods. But they should be careful, and investors should be too. The real challenge for Intel starts now.
In the third quarter, Intel benefited from an incredible set of positives that is unlikely to repeat itself. First off, the economy grew at a stunning rate -- probably better than 6 percent, maybe as quick as 7 percent. It's the fastest growth we've seen since the fourth quarter of 1999, and it simply isn't sustainable. As the effects of this year's tax cuts and refinancing activity ease up, the economy is likely to decelerate. That's not a bad thing -- the slower clip will still be plenty healthy -- but it's not going to be the sort of environment where sales in general ramp up like they did in the third quarter.
While all this heightened economic activity was going on, U.S. companies were in the midst of a big, long-delayed PC replacement cycle. With a little extra cash sloshing around, the computers that were sitting on desks since before Y2K -- you know, the ones with the sticky keys and the flickering screens -- finally got replaced. Buying a raft of new computers was a good way to up production, and far less expensive than hiring back all the workers you let go.
But now the replacement cycle has likely come to an end, and, with hope, companies are going to start hiring again. That isn't bad for Intel. The new workers are going to need new computers, after all. But the coming months don't seem as absolutely terrific as the quarter Intel just saw. In short, we may be about to see how fast Intel can grow in a much more mature tech environment than what prevailed in the 1990s. Tech bulls hope that its secular growth rate is still quite fast, because if it isn't, Intel's still-steep valuation will be hard to justify.
