There are times when blaming others is absolutely the right thing to do. Like just this morning, I was picking up my son to go to the MVA so he could get his driver's license. I let him know I was stopping for a breakfast sandwich on the way and asked if he wanted one.
Of course, knowing that McDonald's will give you two sausage, egg, and cheese McMuffins for $4, I was gonna get two anyway. When I got to my ex-wife's house to get the boy, he didn't want the McMuffin. Said he didn't want to eat gross McDonald's food...
That left me with no choice but to eat his, too. So when my cholesterol has spiked when I see my doctor next, I get to blame my son! See how easy that was?
Anyway, I bring this up because we are in the very heart of earnings season — that magical time when companies get to brag about how well they executed, or else find a socially acceptable scapegoat to blame their failure on.
And as it happens, finding the acceptable scapegoat is very important. It has to be believable. And it has to already be a "thing." Like, remember the polar vortex? That year, after a wicked cold snap, retailers around the country blamed the bad weather for their first quarter disasters.
And remember FedEx from last year's third quarter? FedEx missed pretty badly, and it blamed Trump's tariffs, as I wrote at the time.
Now, that was late December. The S&P 500 had already been selling off since early October. China's stock markets had been dropping for even longer. Growth was weakening, and everybody agreed that it was the trade situation between China and the U.S. that was the root cause.
(I will readily admit I was turning pretty bearish at the time. The one thing that kept me from fully embracing the dark side was the aggressive rate cuts that China made last summer. And it sure looks like those cuts are kicking in.)
Fool Me Once...
Stocks have come a long way in the last six months. And for most of that time, the economic data wasn't being very supportive. But just in the last month or so, some manufacturing and GDP data showed a nice improvement in China. And last week's 3.2% read on U.S. GDP growth for the first quarter was pretty much a blowout number.
Which means companies better have a pretty good scapegoat if they're going to miss their numbers.
Yep, I'm looking at you, Intel (NASDAQ: INTC). (FedEx, too, but I'll dig into that one later.)
Semiconductors are a truly global business (did you know Texas Instruments gets half its revenue from China?). Designed in the U.S., Europe, and Asia. Made mostly in Asia. And used in everyday products around the world. Manufacturers have to get their orders in early. Supply and demand are usually pretty tight. And sales numbers are pretty predictable.
Semiconductor companies make good canaries in the global coalmine because any slack in demand quickly exposes overcapacity issues. Prices and profits fall. And once there's a surplus of chips out there, it has to get worked off, which keeps the pressure on prices.
In this context, it's easy to see why Intel has been a bellwether for so long. Growing corporations buy more PCs with Intel Inside...
And this is the basic scenario that Intel was hoping to evoke when it lowered its revenue and earnings guidance for the next 12 months. Intel was hoping its reputation as a bellwether would mean investors would take its word as gospel and not dig too deep...
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Fool Me Twice, Well, Won't Get Fooled Again
With apologies to W., Intel is telling a bit of a whopper here. In its earnings report last week, it pointed a finger straight at demand, especially in the data center chip space.
Now, data center has been Intel's market for years. Even 18 months ago, its market share was above 95%. We've all seen the speed with which companies haven gotten into the whole cloud thing. That's data centers.
Intel shares were pounded last week when Intel lowered its 2019 revenue by $2.5 billion, from $71.5 billion to $69 billion. That's about 3%, not huge. But Intel's stock dropped nearly 10% that day...
Yeah, it's never good to see a company lower estimates. But I think there's more going on here.
For one, I think Intel isn't the bellwether it once was. I think investors are wondering if Intel will be able maintain its dominance.
For one, Intel has already given up on the 5G mobile market. Yeah, it will still have chips in laptops and PCs. But not phones. This is inexplicable to me. I mean, we all see where the growth of computing is, right? How do you just abandon this market before it even gets going? (As an aside, this is why that QCOM/AAPL news is so significant. QCOM chips will be in every single 5G phone. Yikes.)
The other issue for Intel is that AMD is now posing a strong threat in its traditional markets. AMD reiterated its earnings for 2019: AMD will add around $300–$400 million in revenue.
But next year it's looking at a 21% jump for revenue and a 53% jump for earnings. And it looks to me like those gains are coming right out of Intel's pocket.
Intel is fighting a war on two fronts. That's not an enviable position.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
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