Trust Me: Declining PC Demand Is Killing Chip Stocks

Declining PC Demand Is Killing Chip StocksWarning signs continue to flash for companies in the personal computer (PC) market. The latest warning came from the world’s second-largest chipmaker Advanced Micro Devices, Inc. (NYSE/AMD), as it made a downward revision in its preliminary third-quarter revenues to below consensus, citing the global environment and declining PC demand as reasons for the revision. (Read “U.S. PC Sales Plummet by 11% in Second Quarter.”)

Advanced Micro Devices (AMD) predicted third-quarter (October 18) revenues will decline 10% from the second-quarter revenues. (Source: “AMD announces preliminary third quarter results,” Yahoo! Finance, October 11, 2012.) In my stock analysis, the revision is a major sign of trouble ahead for PC makers and those companies that manufacture chips, hardware, and software for PCs. The revision was downright brutal, according to my stock analysis, as the previous estimate called for a decline of only one percent (plus/minus three percent). A further look shows that AMD has also slashed its gross margin from 44% to 31%.

Intel Corporation (NASDAQ/INTC) also warned to expect less in its third-quarter earnings season, in part blaming the soft global economy and the decline in PC demand. In a company press release, Paul Otellini, President and CEO of Intel, summed it up: “As we enter the third quarter, our growth will be slower than we anticipated due to a more challenging macroeconomic environment.” In other words, companies and consumers are holding back, based on my stock analysis.

Intel made a downward revision in its 2013 guidance, blaming the sluggish global economy. Revenue growth will come in at a low three to five percent year-over-year in 2012, down from the previous high single-digit estimate. My stock analysis is that there’s some work ahead.

Hewlett-Packard Company (NYSE/HPQ) warned the market to expect less in 2013, as the former technology kingpin struggles to revamp its business. As CEO of Hewlett-Packard (HP), Margaret Whitman has a titanic job ahead of her, as she tries to turn the sinking ship around; but with crippling declines in the demand for PCs and intense competition in printers and other businesses, my stock analysis is that the path will be difficult for Whitman and HP, and there is no guarantee of success.

Based on my stock analysis, the PC market is dead, and HP will need to re-invent itself under Whitman’s five-year plan that predicts growth will return by 2015; but my stock analysis is it will not be easy. PC growth is estimated at below one percent this year, according to International Data Corporation (IDC). Making the situation worse, the company’s management is expecting the worst. The PC market may not grow until 2016, according to HP’s Todd Bradley, head of the company’s PC unit.

Dell Inc. (NASDAQ/DELL) is also finding the PC market extremely challenging.

My stock analysis is that the slowing in the PC market is across the board and is also impacting the small-cap stocks, such as Intersil Corporation (NASDAQ/ISIL), a maker of integrated circuits for PCs, which is also noticing the decline in demand for PCs. In a press release, the company suggested its third-quarter revenues would fall 19% year-over-year to below the Street consensus estimate.

Make no mistake about it; the rise of the tablet will rapidly kill off the former PC and chip powerhouses unless there is a major change in their underlying structure, based on my stock analysis.