Chips Are Down for Personal Computers

 | Jul 11, 2013 | 9:00 AM EDT
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After the close Wednesday,  Gartner Research published its second quarter personal computer unit shipment numbers. I posted a brief summary of their conclusions.

The results are pretty sobering if you are an investor in the semiconductor sector. Gartner said personal computer shipments dropped for the fifth consecutive quarter, the longest losing streak on record. Gartner forecasted that desktop and laptop units would decline 10.6% this year.

Investors rushed into the sector in 2010 when they heard about a new version of Windows. They figured Windows 8 would jump start a huge upgrade cycle and carry the sector to new highs. So far, it hasn't turned out that way. When I followed the sector in the 1990s, I remember Fortune 500 companies making announcements they were buying 100,000 new PCs. Nobody does that now.

If you're an investor in Intel (INTC) you have to be nervous. After sales declined in the mid-single digits during 2008 and 2009, they turned around in 2010. Sales in 2010 jumped 24% to $43.623 billion. And it happened again in 2011. Sales were up 23.79% to $53.999 billion. The excitement continued until the stock topped out last April at $28.  Although the stock is down from its highs, I think it has further to fall.

Intel will most likely report in-line quarter on July 17. The PC segment contributes about 2/3 of Intel's sales and investors are bracing for another boring quarter.

The only bright side, servers and cloud computing, account for about 20% of revenue. But that segment is under pressure as datacenters shift to less expensive servers loaded up with ARM (ARMH) processors. Cloud service providers do not want to get caught with "vanity" Wintel servers in their racks. Only lowest-cost generics will do.

Gross margins are likely to be up the next few quarters since the company is in the process of unwinding an "inventory reserve". If you recall, some time ago, Intel wrote off a bunch of inventory. But magically, that inventory -- which is valued at zero -- is coming back onto the income statement in the form of higher gross margins. Neat trick, huh? Intel could add as much as 150 basis points to its gross margins over the next two quarters. (Gotta love those accountants!)

Because the uptake of Wintel PCs has been so weak, investors are losing faith in the second half of the year. Traditionally, the second half has been "back-end loaded" as customers scramble to spend their budgets before the fiscal year is over. But it seems the second half "budget flush" is unlikely. Every estimate I've seen points to a decline of at least 10% in PC shipments for the full year.

How does Intel go higher? Fiscal 2014 estimates call for 4% revenue growth (to $55.665 billion), but is that realistic? This year, revenue is expected to grow just 0.3%. It seems to me analysts will have to start cutting their 2014 forecasts after the company reports next week.

I don't think Windows 8.x will boost 2014 PC sales all that much. If I'm right, I think Intel is worth $18.  In the PC business, the chips are down.

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