Intel Provides Litmus Test for Tech Sector

Its forecast will go a long way in determining whether investors can put faith in a second-half rally.
By Alexei Oreskovic ,

SAN FRANCISCO --

Intel

(INTC) - Get Report

has already come clean about the damage it suffered in the bruising flash memory market during the first quarter.

Now investors are waiting to see how the company's more important microprocessor business is holding up.

The chipmaker's earnings report after the bell Tuesday will provide an important update on the battle with rival

Advanced Micro Devices

(AMD) - Get Report

-- and on the outlook for chip sales amid a souring economic picture.

As to the former, most signs suggest Intel is enjoying smooth sailing thanks to the ongoing meltdown at AMD, which

cut its sales forecast last week. AMD's technical problems and long delays in releasing its quad-core chips have put Intel at a clear advantage.

In February,

Dell

(DELL) - Get Report

, the world's second-largest PC maker, said it would no longer offer AMD processors in the PCs it sells online, limiting its menu of AMD-based machines to its network of retail partners such as

Wal-Mart

(WMT) - Get Report

and

Best Buy

(BBY) - Get Report

.

According to JPMorgan, Intel boosted its market share at Dell from 85% in December to 93% in April. Among the world's large PC makers, or the so-called original equipment manufactures, Intel's market share increased from 79% to 82% during that same time frame.

But investors are too worried about the economy to take heart in Intel's competitive strengths. Intel's shares are down roughly 26% from its 52-week high on fears that consumers and businesses will stop buying as many of the PCs and servers that feature Intel's microprocessors.

Intel shares finished Monday's regular session down 55 cents to $20.69.

"Intel is executing probably as well as we've seen them execute in a decade, but yet the stock is just barely around $20," says Stifel Nicolaus analyst Cody Acree.

Stifel Nicolaus makes a market in Intel and has provided Intel with non-investment banking services in the last 12 months.

Last month, industry research firm Gartner forecast PC unit growth in 2008 of 10.9%, compared with 13.4% growth in 2007. And the firm warned that PC shipment growth could fall into the single digits if economic conditions get worse.

For the first time in several quarters, the average analyst expectation calls for Intel's quarterly sales to come in below the midpoint of its guided range -- Wall Street is looking for $9.63 billion in revenue for the first quarter, compared with Intel's forecasted range of $9.4 billion to $10 billion.

"We believe the lower than expected revenue is being driven by excess microprocessor inventory in the channel and decelerating PC demand," wrote JPMorgan analyst Christopher Danely in a recent note maintaining his neutral rating on Intel shares.

JPMorgan makes a market in Intel shares and expects to receive compensation from Intel in the next three months for investment banking services. Danely or a member of his family owns a long position in Intel.

Analysts expect Intel to earn 25 cents a share in the first quarter. In March,

Intel cut its first-quarter gross margin estimate by two percentage points to 54%

, citing the precipitous plunge in prices for NAND flash memory.

Unlike the well-established

industry-wide problems in the flash memory business

, the health of demand for microprocessors and PCs remains an open question. Investors are bracing for the worst, but actual evidence of a slowdown has yet to manifest itself.

In January, Intel CEO Paul Otellini maintained that the chipmaker hasn't seen any signs of slowing demand, and investors will be listening closely for any change in tone or in financial expectations during Tuesday's conference call.

The options market in Intel is sending mixed signals. The current open interest of the April series shows more than 3 puts to every 1 call. The at-the-money $20 put is the strike of peak open interest, with over 68,000 contracts compared with 30,000 calls.

Monday's option activity was decidedly more bullish, with more than 2 calls trading for every put and the most active strike being the $21 call, which is trading hands at 60 cents a contract.

At that price, the implied volatility, or premium, indicates that the option market is anticipating a 7% move (in either direction) following the earnings report.

Stifel Nicolaus' Acree rates Intel a buy and says he hasn't seen any signs that the dreaded economic slowdown is affecting Intel's business. But he recently trimmed his sales and earnings estimates for Intel ahead of the first-quarter report to reflect the uncertainty in the market.

"There's no reason not to be conservative in estimates these days," says Acree.

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