Intel Is Putting Its Invincibility to the Test - TheStreet

Intel Is Putting Its Invincibility to the Test

The ability of the chipmaker to keep weathering the economic storm may be nearing an end. Quarterly results, due following the close of trading, should offer more clues.
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SAN FRANCISCO -- The buzz on the Street ahead of

Intel's

(INTC) - Get Report

quarterly earnings report on Tuesday sounds a lot like last quarter's -- and like the quarter before that.

Fears that demand for personal computers is drying up have haunted Intel ever since the credit crunch began last summer, with such worries typically reaching a crescendo in the weeks before earnings season.

Intel, which provides the microprocessors for nearly 80% of the world's PCs, has consistently weathered the storm, insisting each quarter that business conditions remain solid.

Whether that immunity remains in effect, as energy prices surge and consumer confidence wanes, will be a key question when Intel delivers its second-quarter financial results after Tuesday's market close.

Intel's stock is down more than 10% from mid-June, as the latest reports pointing to weak PC demand have unnerved investors.

In a recent note to investors, Merrill Lynch reportedly warned of signs of slowing PC demand in June, particularly in China and Europe. Other analysts have pointed to weakness in unit shipments from some of the Taiwanese contract manufacturers that build notebook PCs.

And recent comments about weak global demand from graphics chipmaker

Nvidia

(NVDA) - Get Report

,

which missed its second quarter revenue goals

, have added to the gloomy outlook.

"Nvidia's recent 2Q miss has clearly spooked investors about the health of the PC market," Friedman, Billings, Ramsey analyst Craig Berger wrote in a recent note to investors.

But Berger says the situation may not be as grim as it appears. "While PC checks have been a bit softer over the past month, we believe most of Nvidia's problems were company specific and were not likely representative of the overall PC space."

Friedman, Billings, Ramsey makes a market in Intel shares.

Analysts expect Intel to earn 25 cents a share on sales of $9.3 billion in the second quarter -- the midpoint of Intel's forecasted range of $9 billion to $9.6 billion. That would represent a sequential revenue dip of 3.7% from the first quarter, slightly worse than the 2.8% sequential revenue decline that Intel has averaged in the second quarter during the past 10 years.

Intel has projected that its gross margin will be 56%, plus or minus a couple of percentage points, up from 53.8% in the first quarter, when plunging prices of NAND flash memory eroded the company's profitability. NAND prices have continued to slide during the second quarter, representing a potential wild card for Intel's profit margin.

Meanwhile, the competitive landscape is changing in Intel's two most important markets: server processors and notebook PC processors.

Intel's

sales of server microprocessors in the U.S. were surprisingly strong

in the first quarter, particularly given that server makers

Hewlett-Packard

(HPQ) - Get Report

and

Sun Microsystems

(JAVA)

reported challenging U.S. sales figures for the period.

Of course, Intel had the market all to itself at the time. That changed in the second quarter, when Intel faced a full three months of competition with

Advanced Micro Devices

(AMD) - Get Report

, which finally fielded its quad-core Barcelona processor after months of delays.

How much market share AMD will win back with Barcelona remains to be seen. American Technology Research analyst Doug Freedman believes AMD essentially missed the window of opportunity with Barcelona because of the delays, leaving Intel in the driver's seat.

And Intel's announcement last week that it has displaced AMD as the chip supplier for servers and workstations used by movie-studio

Dreamworks Animation

(DWA)

did not do much to help AMD's claim that it's regaining momentum.

On the other hand, Intel has recently suffered some production delays of its own, releasing its new bundle of notebook PC chips, Montevina,

several weeks behind schedule

.

Sales of notebook PCs are growing much faster than those of desktop PCs, providing Intel with one of its key growth engines in recent years. While the Montevina delay is relatively minor, limiting any downside, it may also rob Intel of any upside in its notebook business during the quarter.

The late availability of the Montevina chips could provide an extra kick to Intel's results in the third quarter, making for better-than-normal sequential comparisons, according to a note by Citigroup analyst Glen Yeung. Still, Yeung adds that Intel will likely provide conservative guidance, given the continuing uncertain economic environment.

Citigroup makes a market in Intel shares, and has provided Intel with investment banking and non-investment-banking services in the past 12 months.

In the third quarter, the average analyst expectation calls for Intel to earn 34 cents on sales of $10.1 billion.