Should Intel Corporation Investors Worry About Weak Earnings at Micron?

Following a worse-than-expected earnings report and outlook from memory maker Micron Technology, shares of Intel have experienced their own downward trajectory. The stock lost a little over 3% the day after the Micron release, followed by another two percentage point drop the next trading day.

So what is going on here? Let's take a closer look at why poor Micron results are causing a sell-off in Intel shares.

Slow PC build activityAccording to Micron President Mark Adams, PC builds "declined well below seasonally slow demand in the first half of 2015." He also remarked that "probably nobody expected the PC segment to be as slow as it's been."

As you might recall, Intel issued an earnings warning earlier this year ahead of its first quarter results, citing "weaker than expected demand for business desktop PCs and lower than expected inventory levels across the PC supply chain."

Now, what is interesting is that during the first quarter earnings call, management indicated that PC vendors reduced their inventory levels during the quarter, and Intel expected PC vendors to burn inventory during the second quarter of 2015 as well.

That is pretty consistent with Adams' comments that PC builds were below demand.

So, what is the problem here?Although it seems like Intel may have already baked in weak PC build activity into the guidance that it issued, the key here is to answer whether Micron did the same. If the answer is "yes," then PC build activity was even worse than the already pessimistic expectations out there. If the answer is "no," then this Intel decline based on the Micron report might not be warranted.

Rewinding back to Micron's second quarter earnings callOn the Micron call back in April,management discussed plans to shift its DRAM production capacity away from PCs toward mobile applications. At the time, Micron's Mark Heil said that the company "anticipates taking strategic action to reduce PC DRAM sales this quarter, given the recent demand and price weakness."

Heil also said at the time that Micron believes that the "PC DRAM segment will show improvement in the second half of the year based on the stabilizing demand profile."

It would appear to me that Micron had already been well aware of the weak PC DRAM environment and was moving to shift capacity away from PC DRAM toward mobile and server DRAM. Unfortunately for Intel investors, that supports the idea that PC DRAM shipments were worse than the already low expectations.

Did Intel bake this into guidance?The question, now, is whether Intel left enough margin in its guidance to account for this purported shortfall. The good news is that the quiet period for the quarter started at the close of business on June 12th. If Intel were to miss current quarterly estimates by a material amount, it would most likely have issued a revenue warning.

The biggest risk I see at this point is a potential softening of guidance during the second half of the year, as this is not something I would expect Intel to warn investors about. However, if full-year guidance was sufficiently conservative, then the current weakness Intel is seeing in PCs might already be accounted for.

When Intel reports its second quarter results on July 15th, investors will need to focus on whether full-year guidance is maintained or revised accordingly.

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Ashraf Eassa owns shares of Intel and Micron Technology, Inc.. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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