Intel Eases Profit Margin Concerns

Intel Eases Profit Margin Concerns

One of the more notable tidbits unearthed during Intel's second-quarter earnings conference call was that CFO Stacy Smith eased gross profit margin concerns by reaffirming the company's long-term target range of 55% to 65%.

During the call's Q&A, Smith was asked whether upcoming Intel Atom products such as Bay Trail or Merrifield will result in gross profit margin declines toward the lower end of the 55% to 65% long-term company target range. Although Smith didn't get into specifics of where Atom would take long-term gross profit margins, he did acknowledge that he was still "very comfortable" with the current range.

This may come as a relief for those who've grown concerned that upcoming Atom products are likely to drive lower average selling prices by cannibalizing higher end processor sales, and put pressures on company profit margins. Now that profitability on a per-unit basis is less of a wildcard, there's still the issue of aggregate revenue growth and total profitability.

Wet blanket
The wet blanket on Intel's second quarter earnings release was that it lowered full-year revenue expectations, which it now believes will be flat on the year. Without revenue growth, Intel's earnings growth potential is seriously lacking and a bit troubling, considering earnings growth is a huge driver of long-term shareholder returns. The headwinds that are facing the PC industry are no joke, with PC prices continuing to fall as everyday users opt for low-cost PCs, or, even worse, tablets, an area where Intel is gearing up for launch.

Modeling off Qualcomm's semiconductor business' average selling price of about $22, Intel will have to sell almost five mobile computing processors to replace the company's average selling price for one PC processor. The only way Intel will be able to drive year-over-year revenue growth is if PC sales stabilize, average selling prices don't decline dramatically, and Intel commands a foothold in mobile computing. It sounds to me as if a lot of things need to go right for Intel.

Value trap?
With no clear path to revenue growth in sight, will investors settle for a company that has consistently stable profit margins but little or no earnings growth? Sure, share buybacks can be accretive to earnings and could even enhance shareholder returns, but I'm seriously doubtful that investors will buy into the idea that a stock is a good investment based on buybacks alone.

As a long-term Intel investor myself, I'm seriously thinking about heading for the exits.

Now, just because Intel is facing earnings headwinds doesn't mean that the company isn't fighting for a shot to shape the future of our technological lives. As you can imagine, Intel isn't the only company wanting to become king in the eyes of consumers. Click here to get all the details free of charge to learn how you can profit from this game-changing opportunity.

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Fool contributor Steve Heller owns shares of Qualcomm and Intel. The Motley Fool recommends Intel and owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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