Intel Can't Shake Investor Angst

Despite a strong sales forecast, the chipmaker can't dispel investor concerns about demand for its products.
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SAN FRANCISCO -- A strong sales forecast is usually enough to settle most Wall Street debates.

But with investor anxiety about demand for PCs running high, and the very contours of the PC market looking fluid, talk of upside from


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did little to sway sentiment on the Street.

Analysts and investors dug in their heels and stuck with their existing views following Tuesday's earnings, with bulls and bears each finding evidence within Intel's report to back-up their positions

Shares of Intel continued to fluctuate within a percentage point or so since the earnings report. The stock was up 25 cents at $20.95 in trading Wednesday.

The market's indecisiveness underscored the extent to which the PC market is at a transition, as hordes of new customers upend the industry's economics, and advances in mobility and Internet access blur the boundaries between PCs and other electronic devices.

Indeed, more than any other topic, Intel's new Atom processor dominated Tuesday's post-earnings conference call. The chip is designed for bare-bones "netbook" PCs, a new class of product epitomized by the


Eee PC, which costs less than $500 for some models and is the size of a hardcover book.

Intel executives said their projections for Atom shipments are running well ahead of initial forecasts made last November. But it was clear that Wall Street is still grappling with what the Atom means for Intel's business in the long run.

Will the Atom tap into an entirely new well of customers, expanding Intel's addressable market, or will it merely cannibalize existing sales of Intel processors used in low-cost notebook PCs?

And who exactly will buy a netbook PC anyway?

"You're dealing with something that most of us wouldn't use, something principally designed for Net access," Intel CEO Paul Otellini told analyst Tuesday in something of an odd endorsement for the product.

Unlike in the PC market, where Intel faces little competition, the netbook foray will pit Intel against numerous firms, including


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Via Technologies

, and potentially even smartphone chipmakers like





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At one point,

Advanced Micro Devices

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talked of an energy-efficient processor for netbook-like devices, although the project's future is unclear as AMD struggles to compete in the existing PC market. Intel's healthy second-quarter earnings report suggested that AMD is still not mounting much of a competitive threat.

In the second quarter,

Intel raked in $9.5 billion in sales

, besting the $9.3 billion expected by analysts. And Intel said it expected sales between $10 billion and $10.6 billion in the current quarter, vs. the $10.07 billion expected by analysts.

Given all the recent noise about faltering PC demand amid souring global economic conditions, Intel's financial results offered a seemingly cogent rebuttal that demand for PCs is in fact holding up. After all, Intel provides about 80% of the microprocessors that power the world's PCs.

"Results were good across the board especially on the unit side and should alleviate some of the macro concerns expressed by investors and affecting the stock over the last two months," said Avian Securities Managing Partner Avi Cohen in a note to investors.

With Intel's stock trading at 13 times 2009 EPS estimates, vs. the 25 times multiple that Cohen say is the stock's historical average, he recommends aggressively buying Intel shares.

Cohen's confidence about the health of the PC market was not shared by other analysts however.

While Intel is currently experiencing normal order patterns, JP Morgan analyst Christopher Danely said that weakness among Taiwanese motherboard and notebook makers indicate that the PC market is "cracking."

Danely, who rates Intel a neutral, expects "downside to PC-related semiconductor companies such as Intel for the September quarter to occur during the last month of the quarter as the PC supply chain realizes demand is below seasonal and channel inventory needs to be worked down."

JP Morgan makes a market in Intel shares, has provided Intel with non-investment banking services in the past 12 months, and expects to receive compensation for investment banking services from Intel in the next three months.

Meanwhile, the growing importance of consumers in emerging markets, like China and India, is altering the type of demand for Intel's products.

Intel blamed the market's shift to low-cost notebook PCs for a weaker-than-expected gross margin in the second quarter -- 55.4% vs. its expectation of 56%, plus or minus a couple of points.

No one expects the emerging market trend to reverse, which raises questions about the future of Intel's profit margins.

Intel's Atom chip, which the company says can be made at lower costs than its traditional processors, is one way to adjust to the new market dynamics. But Intel acknowledges that the profit margins on the Atom chip are about 10 percentage points below those of a mainstream dual core microprocessor.

Intel will need to sell a lot of Atoms to make up for the lower margin. With the market for the Atom chip still nascent and somewhat undefined, and the state of broader consumer demand up in the air, many investors seem to be waiting for more answers.