Updated from 1:15 p.m. ESTLike a movie that keeps getting worse, Intel's ( INTC) storyline took another bad turn Friday. The world's largest chipmaker announced that its financial results for the first quarter would fall short of its previously set projections. The warning marked the second consecutive quarter that Intel will miss its guidance, and underscored the company's ongoing struggle to regain its footing in the face of fierce competition from rival Advanced Micro Devices ( AMD). Intel said it expects its top line to range from $8.7 billion to $9.1 billion in the March quarter, below the Thomson First Call consensus for $9.42 billion, and its own guidance of $9.1 billion to $9.7 billion. The company blamed the revenue shortfall to weaker-than-expected demand and "a slight market-share loss." This loss in market share would appear to be in addition to the one percentage-point loss that Intel executives acknowledged the company suffered in the fourth quarter. But while the bad news caused Intel's stock to lose some ground, it didn't trigger the massive selloff that accompanied its previous miss. In midday trading Friday, shares of Intel were down 1%, or 21 cents, at $20.28. Ironically, AMD's shares were faring worse, falling 77 cents, or 1.9%, to $40.56. For some investors, Friday's warning represented a vestige of the old Intel, which was already factored into the stock's depressed price. Intel's anticipated comeback isn't slated to begin until later this year, when the company rolls out a new chip microarchitecture along with a bevy of new products. "There's nothing Intel can really do until the second half of this year to stem material share loss," said J&W Seligman semiconductor analyst Sangeeth Peruri. And with Intel shares trading at their 52-week low, the question facing some investors is when the right time to get into the stock will be.
"I think there is some potential downside to Intel from here," said Peruri, whose firm owns Intel shares. But he added that a bigger risk than material downside is that the stock would simply remain in its moribund state for some time to come. Bob Bacarella, portfolio manager for the Monetta Fund, said Friday's warning came as no surprise. "The chart's been telling us this for a long time. This is not new news," he said. But Bacarella, who owns shares of AMD, said he was still not convinced that Intel's stock has hit its floor. "I'm going to wait for proof that people believe that what they're doing is going to have an impact on their long-term financials," said Bacarella. Some investors had been looking ahead to the Intel Developer Forum, which will take place in San Francisco next week, as a showcase for Intel to demonstrate the vitality and viability of its resurgence. But with Intel now in a quiet period, following the midquarter warning, it seems that the event will leave many questions about the company's comeback unanswered. Intel's three-paragraph warning Friday was chock-full of red flags. The company's first-quarter gross margin, which Intel had projected to be 59% plus or minus a couple of points, will be adversely affected by the lower-than-expected revenue. What's more, expenses, including R&D, will be less than previously forecast as a result of the sales shortfall. In January, Intel had trumpeted increased spending as one of the main weapons in its arsenal to put pressure on AMD. At the time, Intel said it would boost capital spending and R&D 19% and 27%, respectively, in 2006, as it moves toward advanced 65-nanometer and 45-nanometer-based chips. "Although the year did not finish as strong as we expected, we look forward to a year of solid growth in 2006, thanks to a very strong product road map," CEO Paul Otellini said in a conference call with analysts in January.
As the current quarter has progressed, however, there has been growing skepticism on Wall Street about the state of Intel's business. On Wednesday, analysts at J.P. Morgan predicted that shrinking market share at Dell ( DELL) and competitive pressure from AMD would cause Intel to miss its sales forecast. "We believe Intel's inventory is increasing faster than expected while its largest customer, Dell (19% of calendar 2005 revenue), continues to lose market share," J.P. Morgan said. "As a result, we believe Intel could have almost $800 million of excess inventory in the first quarter, far above the $300 million excess in the fourth quarter of 2005, which adds risk to gross margins." J.P. Morgan analyst Christopher Danely was similarly skeptical after Intel's January earnings update, saying: "We continue to believe additional downside to estimates is likely due to a continued inventory correction and excess processor capacity in 2006." (J.P. Morgan has been involved in a public offering of debt of equity for Intel within the past 12 months.) Also on Wednesday, Morgan Stanley revised its estimates for AMD's earnings, lifting projected 2006 EPS to $1.70 from $1.60 as a result of the company's increased penetration in the enterprise server market.