Will Consumer Clip Intel's Chip Sales?

SAN FRANCISCO -- It's been a rough start to the year for Intel's(INTC Quote - Cramer on INTC - Stock Picks) stock.

After only two weeks of trading, the chipmaker's shares are down more than 12% in 2008, closing Monday at $23.08.

Now, the company will get a chance to answer the bears when it reports fourth-quarter earnings after Tuesday's close.

News You Need: Forest Lab, Intel

From a competitive standpoint, Intel is in tip-top shape, mopping the floor with Advanced Micro Devices(AMD Quote - Cramer on AMD - Stock Picks).

But the Street's interest has moved beyond the microprocessor rivalry, and is now preoccupied with weightier matters.

The big question hanging over Intel -- as well as the overall tech sector -- is whether a slowing economy will derail sales of PCs and other electronic goods. Some investors fear a recession is around the corner; others believe consumer spending is already drying up.

The bear case was in full force earlier this month when two financial analysts hit Intel with back-to-back downgrades, warning of weakening PC orders and rising inventory levels.

"With the backdrop of weak U.S. economic conditions heading into a seasonally weak first half of 2008, we believe that revenue upside past 4Q will also prove more difficult to achieve," wrote Bank of America analyst Sumit Dhanda in a note to investors downgrading Intel.

Intel's sales forecast for the fourth quarter isn't exactly brimming with confidence. The midpoint of its guided revenue range, which is also the average analyst expectation, calls for $10.8 billion in sales, or 7% sequential growth.

That's quite a bit lower than the average of the past five years, in which Intel experienced a 13% bump in revenue from the third quarter to the fourth quarter.

According to comments by Intel CEO Paul Otellini in October, the expected softness in the fourth quarter is simply a reflection of the company's exceptionally strong third-quarter sales growth -- Intel's best in 10 years.

Indeed, the overall sales growth Intel expects in the second half of 2007 vs. the first half of the year looks strong compared with recent years.

And after seeing its margins crumble last year, Intel has projected that its fourth-quarter gross margin will be 57%, plus or minus a couple of points, up from 52% in the third quarter.

Analysts polled by Thomson Financial are looking for Intel to report EPS of 40 cents.

With the PC market now entering the seasonally slow period of the year, though, and with Wall Street awash in economic anxiety, some investors see a lot of downside risk.

"You've got some black clouds over the stock," says Daniel Morgan, a portfolio manager at Synovus Trust, which owns Intel shares.

Morgan believes the $1.51 in EPS that Wall Street expects of Intel in 2008 looks particularly shaky in the event of an economic slowdown.

"You might have some short-term answers [in Tuesday's earnings report], but as we move through the first quarter of 2008 and rest of year, there are some issues out there in regards to the company's ability to execute towards that number," says Morgan.