For the past six months,
Needham & Co.
semiconductor analyst Tad LaFountain has taken heat for his bearish calls on Intel, the chip company that everyone loves to love. But after Compaq
warned analysts about its earnings Friday, investors began worrying about the chip giant as well. A downgrade on Intel Monday morning by
BancBoston Robertson Stephens
analyst Dan Niles to long-term attractive from strong buy added to the air of gloom.
But there's no reason to overreact, LaFountain says, although he points out that investors should have seen this coming.
"Just as people shouldn't have gotten unduly euphoric over the seasonal uptick
in Intel in the fourth quarter, they shouldn't get unduly depressed now," he says. (Needham is not an underwriter of Intel.)
He isn't changing his hold rating on the stock and doesn't think Intel stock will head higher anytime soon. In the second half of last year, Intel reported an increase in demand and sales, but LaFountain says that was just a seasonal rise in PC demand that created a rush to buy chip stocks. But he didn't expect a much longer-term cyclical upturn to begin until around now, in the second quarter. While seasonal gains are short term, cyclical gains are multiyear events. Still, many people confused the two late last year, he says.
"The seasonality is always second-half loaded," LaFountain says. So he expects the gains that the chip industry saw in the second half of last year to fall off. "There is just no way the first half would not disappoint in the PC channel. Large-caps have been fully exploited. They may have to wait a year before they get the next clear-cut upturn."
What the Intel bulls ignore, he says, is how ugly Intel would look now if it weren't for manufacturing blunders by
Advanced Micro Devices
. AMD has eaten into Intel's market share in the retail PC market, even though AMD has had massive problems delivering its higher-speed chips. If AMD had been able to function without operational snafus, Intel would have had a terrible quarter, he says. AMD's much-anticipated K-7 chip, due out this summer, will give Intel stiff competition.
That's the bear's view on Intel, but what do the bulls say? Again, don't panic, says
Intel analyst Jim Barlage, who is sticking with his 52-week price target of 90 on Intel, which looked more plausible in January, after the stock hit an all-time high of 71 13/16. "There is nothing new in our view," Barlage now says. He's been warning of a slowdown in the PC market for weeks because of a stronger-than-expected fourth quarter and deferred shipments as people waited for the arrival of the Pentium 3 chip.
Intel's losses today are giving investors a buying opportunity, Barlage says. He expects the stock to begin to rebound Wednesday after Intel's first-quarter earnings report, due Tuesday afternoon, which should include positive guidance on the near future. (Lehman is an underwriter of Intel.)
So what should investors do? Toby Levitt, a fund manager with
Albion Management Group
, which manages $240 million in individual portfolios, sold shares of Intel last week for his short-term growth accounts. "My contacts in the industry were saying things were not as robust as they had hoped in a number of companies --
But he is holding firm for his long-term investments. "In the short term, I think the PC area will be under pressure," Levitt says. "But I still think Intel is a dominant player. They are such a big, strong company. They will do fine."