Citigroup (NYSE:C) downgraded chip makers such as Intel (NASDAQ:NTC) and Advanced Micro Devices (NYSE:AMD) on Thursday, citing a pessimistic outlook for PC sales in Asia and a weaker-than-expected response to new software like Microsoft’s Windows 8.
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The New York-based bank, which also downgraded Marvell Technology (NASDAQ:MRVL), revised lower its 2013 estimate on PC growth, reflecting a decline of 1% compared with an earlier view of 4% growth.
“The intermediate-term prospects for PCs do not look optimistic,” Citi analyst Glen Yeung said in a report. “Robbed of catalysts, we see limited likelihood PC-related shares will appreciate meaningfully in coming months, despite valuations.”
We must recognize the likelihood that PC sales may be at a tipping point, more permanently suffering at the hands of new personal portable connected devices.
Citi said that at the start of 2012, the industry had been hopeful for a boon to PC unit growth given the expected launch of Microsoft’s (NASDAQ:MSFT) Windows 8. While September production is up 20% from a dismal August, Yeung said it is “increasingly evident” that a rebound “is unlikely.”
To be sure, Yeung said that it is conceivable demand will spike with the Windows launch later this year, however he said several factors, such as high license fees and tablet cannibalization, will likely limit its success.
“After an initial build recovery in September and October, we suspect PC-related builds will again soften from November onward,” Yeung said, adding that he expects Wall Street’s consensus estimates to fall in the coming months as well.
Citi sees Intel revenue of $13.4 billion for the fourth quarter, compared with the consensus of $13.9 billion, on GAAP earnings of 51 cents, compared with the Street’s view of 57 cents. It downgraded Intel to “neutral” on a $25.75 price target.
Intel cut its own outlook last week citing PC demand. The Santa Clara, Calif.-based company also said it was scaling back capital spending to make up for a slowdown in business. Its shares are down nearly 5% from Friday’s announcement.
“We must recognize the risk/likelihood that PC sales may be at a tipping point, more permanently suffering at the hands of new personal portable connected devices,” such as tablets and smartphones made by companies like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), Yeung said.
Meanwhile, Citi anticipates AMD quarterly sales of $1.39 billion, compared with average analysts’ $1.48 billion, on earnings of 3 cents, far below the consensus’ 17 cents. The bank downgraded the chip maker to “neutral” on a price target of $4.25.
Marvel sales are expected to be $790 million for the current quarter, Citi estimated, below the Street’s view of $833 million, on earnings of 24 cents, a penny below the consensus. Citi chopped the chip maker’s rating to “neutral” on a price target of $11.50.