Coronavirus Uncertainty Places Intel and AMD in the Spotlight as Microsoft Warns of Revenue Target Shortfall

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With Microsoft (NASDAQ:MSFT) declaring on Wednesday its inability to meet the target revenue for the personal computing business due to supply chain disruptions emanating from the coronavirus epidemic, the semiconductor sector behemoths Intel (NASDAQ:INTC) and AMD (NASDAQ:AMD) are now on investors’ negative guidance watch.

Microsoft said in a statement on Wednesday:

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“Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated.”

Analysts had already noted that Microsoft’s revenue guidance of $10.75 billion to $11.15 billion for the personal computing segment was less precise than usual, reflecting the uncertainty surrounding the coronavirus outbreak. Bear in mind that Microsoft derives its Windows OEM revenue by selling Windows licenses for commercial and non-commercial PCs.

Microsoft’s update is simply the latest in a growing litany of such announcements in recent times.

Last week, Apple (NASDAQ:AAPL) declared its inability to meet its quarterly revenue forecast because of supply chain disruptions and lower Chinese demand on the back of the coronavirus outbreak. The company had initially expected to report net sales between $63 billion and $67 billion for its second fiscal quarter of the year. Apple did not provide a new forecast for its quarterly revenue.

HP (NYSE:HPQ), the second-largest PC maker behind Lenovo, also declared this week that it expects the coronavirus epidemic to negatively impact its top and bottom lines, with a precipitous drop in activity in China affecting both supply and demand.

HP’s CFO Steve Fieler said during the earnings conference call earlier this week:

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“…the coronavirus may ultimately push out some of the Windows 10 refresh timelines given some of the constraints we’re going to see in Q2”.

Similarly, Lenovo (HKG:0992) CEO Yuanqing Yang said during this week’s conference call that most of its factories in China had reopened, but conceded that supplies would remain constrained this quarter.

NVIDIA (NASDAQ:NVDA) was able to provide an estimate of the coronavirus hit to its revenue, stating that it expects a revenue shortfall of $100 million vis-à-vis the earlier guidance. According to the company, the epidemic would hit consumer-spending patterns as quarantines are extended and businesses remain closed.

Which brings us to the semiconductor behemoths Intel and AMD. On Monday, David Wong, an Instinet LLC analyst, warned that risks posed by the coronavirus outbreak to the global semiconductor industry have grown in recent weeks:

“We think that many investors, and companies, may have underestimated the risk of the current issues impacting electronics end market demand through 2020. We think there may be risk to demand in most electronic end markets, though we believe the end markets associated with consumer purchases might have the most potential downside. We remain cautious on the chip industry overall and selective in our chip and chip-equipment stock picks.”

Both Intel and AMD reported their earnings quite early in the cycle and have yet to provide an updated guidance regarding the expected revenue hit from the outbreak. However, it seems that the market is already factoring in the high probability of such announcements in the coming days, as illustrated by the decline in stock prices of both Intel and AMD following Microsoft’s guidance update yesterday. For context, AMD’s stock declined by 1.5 percent while Intel’s receded by 1.61 percent in the after-hours trading following Microsoft’s announcement.

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