Associated Press writers are generally not known for their surrealistic tendencies. But the lede to today's AP story about Intel's stock-market performance almost defines non sequitur: "Shares of bellwether Intel Corp. jumped Wednesday after the world's biggest computer chip maker reported a 29 percent drop in second-quarter earnings late Tuesday."
What would have happened had Intel reported a 58% drop in second-quarter earnings?
Intel's shares were, in fact, up 4.5% today. Investors dismissed the fact that the company missed estimates by two cents and actually reported a slight decline in revenue, instead favoring mildly upbeat comments by Intel executives about the coming two quarters. When investors are this bullish, even the slightest hope of an improved earnings outlook is enough to send them charging.
In part, of course, the rise in Intel's stock over the past month--during which time it's up nearly twenty points--is the result of the company's careful managing of expectations. By successfully talking down analysts' estimates of what it was going to earn, Intel (like so many companies) was able to avert the kind of dramatic shortfall that often sends stocks plunging. And even though analysts' estimates for the quarter were almost a third lower than they had been when the year began, all Intel had to do was meet them--or almost meet them--in order to bring a smile to tech bulls' faces.
Still, Intel did miss estimates. So why wasn't the stock punished, even if only mildly? The answer has much to do with the continued power that investment bank analysts exercise over the market's short-term perception of companies, and with those analysts' determination to protect their reputations. That's why last night, after Intel's conference call in which it reported earnings and talked about the coming months, Reuters ran a story with the headline: "Intel Beats Expectations - Analysts," after earlier running one headlined "Intel Misses Estimates." The former story quoted analysts explaining that Intel's numbers included a larger-than-usual writedown of inventory (the result of a successful cost-cutting program), and that if you omitted those numbers, then Intel actually earned 70 cents a share, beating the 68-cents-a-share estimate.
Now, no one at Intel argued this, and when you consider that the cost-cutting program was part of normal operations, it's hard to see why the writedown should have counted as one of those mythical "one-time charges" that companies use to make their earnings look better. But it's no coincidence that the analysts pushing this interpretation included Hambrecht and Quist's Rob Chaplinsky and Piper Jaffray's Ashok Kumar, both of whom are well-known Intel bulls and who have "buy" recommendations on the stock. Chaplinsky, in fact, has referred to himself as the Intel "ax," which means that he believes his opinion can move the stock. Making sure that the best spin possible was put on yesterday's earnings, then, was a self-interested gesture, to say the least.
This doesn't mean that yesterday's numbers were clear, and that Chaplinsky's interpretation was obviously wrong. Accounting is, ironically, notoriously inexact when it comes to measuring profit in meaningful terms, and earnings numbers have become so distorted by one-time charges, writedowns, etc., that it's hard to know what is real and what isn't. And Intel remains a powerhouse company. (Even with the drop, it did earn $1.17 billion in the quarter, after all.) But Intel executives hardly painted the kind of glowing picture of the future that would justify a real run-up in the stock. The chief financial officer said of the new quarter, "It starts off pretty slowly. As a result, we will stick with flat to up slightly for now, and hope to beat [that forecast]." In that sense, the jump in the stock price today says less about what Intel's future will be than it does about the success of the bulls' PR campaign. For today, at least, Chaplinsky really was the ax he wants to be.