Intel Facing Critical Month, Says Analyst

(Updated with more analyst commentary and stock price.)

NEW YORK ( TheStreet) -- Intel ( INTC) is facing a rough patch on weak demand for consumer PCs.

"If demand does not materialize in the next four to six weeks and the PC holiday builds are weak," there could be more downside for Intel, said Wedbush Securities analyst Patrick Wang. Right now, Intel "simply has no visibility to confidently guide Q4."

The chipmaker said Friday that its third-quarter revenue will be below the company's previous outlook due to weaker-than-expected demand for consumer PCs in mature markets.

As a result, analysts believe demand in the consumer PC market over the next four to six weeks will significantly impact Intel's results.

Intel said in a press release that it now expects third-quarter revenue to be $11 billion, plus or minus $200 million, compared with the previous expectation of between $11.2 billion and $12 billion.

Intel said the impact of lower volume is being partially offset by slightly higher average selling prices stemming from enterprise demand.

All other expectations for the third quarter remain unchanged. Intel said that inventories across the supply chain appear to be in-line with the company's revised expectations.

Shares of Intel briefly dipped into negative territory this morning to $18.16, down 0.1% -- before popping back up into the green at $18.41, up 1.3%.

Sterne Agee analyst Vijay Rakesh said Intel's announcement on Friday provides investors a downside baseline to think about. "They know what the downside is now. So you still see some positive reaction in the stock."

"I don't think the preannouncement is much of a surprise," Wang said."The negative PC data points have been well telegraphed over the last couple months. All the suppliers in Asia said they were expecting a softer July and back to school sales were going to be disappointing." Also, "some investors think preannouncements get bad news out of the way."

HP ( HPQ) and Dell ( DELL) had already warned of disappointing back to school sales and a delayed back-to-school season, Wang pointed out.

Overall, the weak consumer PC sales are a reflection of the poor economy, according to Wang.

Advanced Micro Devices ( AMD), Nvidia ( NVDA ), Marvell Technology ( MRVL) and LSI ( LSI) are major Intel rivals that could also be affected by the weaker-than-expected consumer PC demand, Sterne Agee's Rakesh said.

And it could be most painful for rivals such as Nvidia and LSI, given their consumer-focused products.

Williams Financial analyst Cody Acree pointed out that "they're less enterprise-based ... so if you're getting a shift mix to corporate markets, especially where your average selling prices are typically higher, it's a double hit to those firms that are consumer-levered."

Acree said the impact on Intel from the weaker consumer PC markets will not be as bad as long as corporations are still running with relatively aged technological infrastructure and require upgrades -- which they can currently afford to do. According to Acree, "we're seeing the healthiest corporate balance sheets in many years ... cash-rich companies with little debt."

Intel's expectation for third-quarter gross margin is now 66%, lower than the previous expectation of 67%, but analysts said that 66% is still "hot."

"Sixty-six percent is an amazingly high gross margin for chip company," said Wang. He said the company's strong product mix is helping to keep margins in the ball park. Meanwhile, Roth Capital Partners' Arnab Chanda said 66% is close to an all time high and "very impressive."

Acree calls the 66% figure a "hot number. He would be concerned however, if Intel's gross margin figure had dipped to 56% due to a double-dip recession and other factors. "If things slow down, you end up having the same overhead but not the same revenue, so that changes margins very quickly if you're a manufacturing company with very expensive overhead factories." Intel controls its own manufacturing, Acree pointed out.

Currently, Gleacher's Earl Hege, Rakesh and Chanda are among analysts who don't believe Intel's lowered guidance will have a big impact on the company's bottom line. Chanda said he doesn't see a "catastrophic impact on EPS."

-- Written by Andrea Tse in New York.

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