Intel: What Went Wrong

Updated from 11:49 a.m. EST

Invstors were looking for answers a day after Intel(INTC) stunned the Street with a fourth-quarter miss and a bleak outlook for the current quarter.

Intel shares tanked as the predictable downgrades poured in. Citigroup cut the stock to hold on concerns about the chipmaker's near-term profitability and ability to estimate reseller inventories. UBS and Piper Jaffray did the same, citing the potential for weakening growth and gross margins.

In midday trading Friday, Intel shares were down $2.98, or nearly 12%, to $22.54. That followed the stock's 9% drop in extend trading Tuesday after the release of the financial results.

Intel said Tuesday that fourth-quarter earnings rose 16% to $2.45 billion, or 40 cents a share, missing estimates by 3 cents due to a shortfall in sales of microprocessors for desktop computers. Fourth-quarter sales rose 6% to $10.2 billion, well below the company's previous estimate of $10.4 billion to $10.6 billion and the Wall Street consensus estimate of $10.56 billion.

The outlook for 2006 is equally bleak, with Intel projecting that annual growth will dip into single-digit territory for the first time in three years. The bundle of bad news sent shares of Intel plunging $2.90, or 11.4%, to $22.62 early Wednesday, their lowest level since early November. Shares of other computer-oriented companies including Microsoft(MSFT) and Dell(DELL) took collateral hits.

For analysts and investors who expected 2006 to be the year in which new products helped Intel regain its stride, Tuesday night's report was a splash of cold water.

"We continue to believe additional downside to estimates is likely due to a continued inventory correction and excess processor capacity in 2006," wrote J.P. Morgan analyst Christopher Danely in a note. (J.P. Morgan has been involved in a public offering of debt of equity for Intel within the past 12 months.)

The big question confronting many investors centered on how much of Intel's woes stem from weak market demand and how much are the result of poor execution within Intel.

Intel suggested that both factors were at play in its post-earnings conference call Tuesday, citing its own ongoing inability to produce enough chipsets, an inventory build among customers and soft demand for desktop PCs.