Intel8217;s shock warning sounds alarm for tech sector

Intel, the biggest maker of chips for personal computers, forecast fourth-quarter revenue of 9 billion, plus or minus 300 million. That compares to its October forecast of 10.1 billion to 10.9 billion, and the average analyst estimate of 10.3 billion according to Reuters Estimates.

8220;For revenue to be that far down sequentially, it means consumers have basically shut down for the holidays,8221; said Charter Equity Research analyst John Dryden. Intel8217;s third-quarter revenue was 10.2 billion.

8220;It8217;s so far below what they had expected 8230; The company had outlined weakness in enterprise but not the consumer yet,8221; Dryden said.

The impact of Intel8217;s warning was exacerbated by weak outlooks from two other chip industry heavyweights, Applied Materials Inc and National Semiconductor Corp on Wednesday.

8220;The last six weeks of turmoil in the financial markets is unprecedented. The weakening global economy will have significant impact on all of Applied8217;s businesses,8221; Chief Executive Mike Splinter said on a conference call.

Investors had been expecting Intel to cut its outlook since the company had scheduled a mid-quarter update on Dec. 4, its first in three years.

The early warning on Wednesday was worse than many had feared, fueling worries that the slump in global technology spending was sharper than anticipated and could last longer than previously predicted.

Taunya Sell, analyst at Wells Fargo division Ragen MacKenzie, said analysts are going to have to adjust their 2009 forecasts 8220;to reflect the new reality.8221;

8220;Obviously this has implications for Microsoft in the PC market,8221; Sell said. 8220;Their business tracks PC shipments as well. I think this is affecting everyone, and those that say it8217;s not will have to come to the altar in January.8221;

TECH SHARES HAMMERED

Intel said the PC industry supply chain was aggressively reducing component inventories. The company makes about 80 per cent of the world8217;s microprocessors, which power PCs.

It also sharply lowered its gross profit margin outlook to 55 per cent, plus or minus a couple of per centage points, from 59 per cent, plus or minus a couple of per centage points, and said it would cut spending.

Other stocks that scraped multiyear lows on Wednesday include Dell Inc, which fell 4 per cent, and Hewlett-Packard Co, which fell 2 per cent. Both PC makers are scheduled to report results later this month.

Shares of Cisco Systems Inc, which holds its shareholder meeting on Thursday, dropped 3 per cent.

John Menzies, portfolio manager at Pacific Growth Equities in San Francisco, said Intel8217;s miss 8220;is more evidence to the severity of the consumer slowdown.8221;

8220;You could make the point they are looking to take advantage of an oversold market to become more conservative with their guidance. But then, they8217;ve lowered the bar a lot. You8217;re seeing futures reacting to this already,8221; he said.

Last week, Intel warned that the credit crisis could hurt demand for its chips and lead to the insolvency of key suppliers, according to its 10-Q quarterly report to the US Securities and Exchange Commission.

American Technology Research analyst Doug Freedman said Intel8217;s warning raised questions over how far along into the downturn the industry is, and how much of the bad news is now out of the way.

8220;The normal pattern is for Intel to be down 10 to 12 per cent in the March quarter and now we are seeing that type of behavior in the December quarter,8221; he said. 8220;So the real question that investors have 8230; is what is March going to look like off of this new number.8221;

Peter Jankovskis, director of research at Oakbrook Investments LLC in Lisle, Illinois, expected the news to push stocks down between 4 and 10 per cent, but noted that Intel8217;s long-term outlook was solid.

8220;In all likelihood, this is a bump in the road and a good buying opportunity,8221; he said.