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Chip Stocks Plunge on Intel's Lowered Revenue Expectations

Tech: The drop reflects concerns about the industry and technology spending cycle.

June 08, 2002|JOSEPH MENN | TIMES STAFF WRITER

Investors worried that technology spending won't rebound soon slashed almost 19% from Intel Corp.'s market value Friday after the world's biggest microprocessor manufacturer cut sales forecasts.

Intel stock plunged from $27 to $22, its lowest level since October, wiping out $33 billion in market capitalization. Shares of other chip makers, including Advanced Micro Devices Inc., and providers of equipment used to manufacture chips also fell.

The sell-off followed Intel's warning after the markets closed Thursday that sales for the second quarter would come in between $6.2 billion and $6.5 billion, setting a midpoint below the Santa Clara, Calif., company's previous projection of $6.4 billion to $7 billion.

Intel also cut its expectations for gross profit margin from 53% to 49% as its more lucrative chips lose ground to less expensive ones.

Coming just two months after Intel forecast widening profit margins, the warnings were "out of left field" and spooked investors, said Morgan Stanley analyst Mark Edelstone.

The majority of the problems have more to do with Intel than with the semiconductor industry as a whole, analysts said.

More than competitors such as Texas Instruments Inc. and National Semiconductor Corp., Intel depends on the fortunes of the personal computer industry, in which four out of five machines use Intel chips.

"This is an issue relating to desktop PCs, and Intel simply ended up with a weaker product mix, causing average selling prices to be lower," Edelstone said.

Unsold personal computers cluttered store shelves in April, when sales dropped 22%, and the backlog hurt Hewlett-Packard Co. and other computer firms.

Since then, companies have been working off that inventory rather than buying chips to make new machines

"We continue to believe that the three-year PC replacement cycle is stretching back out to a four-year PC replacement cycle, which looks like it can only begin in 2003," Lehman Bros. analyst Dan Niles said.

In another ominous sign, Intel officials said they saw little of the typical June increase in demand as computer firms begin building machines for the August and September back-to-school selling season.

The severity of Intel's stock drop reflects both investor concerns about the chip industry and the technology spending cycle as a whole. This week, an industry group cut its overall sales growth estimate for chips for the year in half to 3%.

And while unemployment figures and other economic indicators have been improving, analysts said most big companies are still reining in spending on new equipment.

"Our belief is that spending recovery in the second half is highly unlikely," said U.S. Bancorp Piper Jaffray semiconductor analyst Ashok Kumar. "Recovery from recession is a multiyear process."

Chip stocks swing more wildly than those in most industries because investors are trying to gauge an uncertain future and the cycles are deeper.

As PC sales dropped by as much as 25% a quarter from their peak in 2000, chip sales fell by as much as 45% and semiconductor equipment sales slumped as much as 65%, said Banc of America Securities analyst Doug Lee.

For more than a decade, the conventional wisdom has been to buy shares in semiconductor firms when computer sales are the lowest in a cycle. After that point, the demand for chips can only go up, bringing increased sales and profit.

In the chip-stock downturn of 1996, that worked almost too easily. Demand for chips was higher at the end of the downturn than it had been at the beginning.

But this time, there are no clear signs of a PC rebound that everyone had long considered a certainty.

"People have learned how to [buy shares] at the wrong time," Lee said. "You look at this cycle, and the level of demand is lower than when we went into the downturn. Investors haven't learned that yet."

They may have more learning ahead of them. Chip shares are trading at 30 times their expected earnings next year, while the Standard & Poor's index as a whole is trading at about 20 times earnings.

"We're just bouncing off a very low bottom," Lee said. "For the last 12 months or so, chip companies have not been getting orders, causing the inventory to be burned off. But that doesn't make it sustainable."

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