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Intel warning sparks selloff
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March 4, 1998: 8:58 p.m. ET
Chip giant's forecast sends shock waves through tech industry
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NEW YORK (CNNfn) - Intel Corp. sneezed Wednesday and the rest of the technology sector quickly got a cold.
Moments after the stock market closed, Intel, the world's largest chipmaker dropped a bombshell on the technology industry -- telling investors the company would fall short of Wall Street estimates for the first quarter.
The statement sent shock waves all the way from Wall Street to Silicon Valley.
In Chicago, the S&P futures index on Globex dropped about 12 points, a move which would translate into a decline of more than 100 points for the Dow on Thursday.
Dell Computer Corp. (DELL) tumbled almost 10 points to 129 a share, shedding all of the gains posted earlier in the day. Motorola Inc. (MOT), lost nearly a point to 56 while Texas Instruments Inc. (TXN) fell nearly 2-1/2 to 52 after hours. Microsoft Corp. (MSFT) dropped nearly 4 to 78 and International Business Machines Corp. (IBM) fell 3-1/16 to 99.
Intel shares, which were halted briefly, tumbled almost 10 points in after hours trade to 77.
Industry analysts said Intel's warning is a sign that the rally in semiconductor stocks may be coming to an end.
"I assume the rally in semiconductors is over and we'll see more weakness," said Don Hays, director of investment strategy at Wheat First Union Hays. "This is (corporate earnings) pre-announcement season and this is kicking it off."
In its statement, Intel said first quarter revenues would be about $5.85 billion -- 10 percent below the fourth quarter of 1997 and the year ago period. Intel also said gross margins -- the difference between what Intel's chips sell for and the costs of manufacturing -- would drop to around 53 percent in the quarter from a previous estimate of about 59 percent.
Based on those guidelines, analysts said Intel's first quarter profit could drop to around 70 cents a share from earlier estimates of 93 cents and a year ago profit of $1.10.
Industry analysts attribute Intel's woes to increased competition from cheaper rivals, weaker demand from personal computer makers and the growing popularity of the sub-$1,000 PC.
"There's excess inventory of PC's in the channel that's really hurting Intel," said Megan Graham-Hackett, technology analyst at Standard & Poor's. "It's not being able to sell to the Compaqs and IBM's and HP's so it's basically they can't record those sales, so revenues are worse than expected."
In the past, Intel was able to protect its profit margins by introducing faster and faster semiconductors that constantly raised the bar for competitors. However, as customers have flocked to the sub-$1,000 PC, Intel has been slow to respond.
Later this year, the semiconductor giant plans to introduce a less expensive chip that will be geared toward cheaper PC's. But, in the meantime, analysts said Intel is likely to face increased pressure.
"Our expectations for the second quarter are pretty modest already. We don't think it will help not having any momentum going into it," said Daniel Scovel, analyst at Fahnestock.
Intel's warning comes just days after Compaq, the world's largest supplier of personal computers, warned of a tougher pricing environment in North America and Merrill Lynch downgraded the stock to "accumulate" from "buy."
Industry analysts said the statements from Compaq and Intel could signal a build-up of PC's in the inventory channel, but it's difficult to determine how much that will hurt the technology sector.
"Collectively, it's a weaker market than the December quarter," said Rob Chaplinksy, technology analyst at Hambrecht & Quist.
"What Intel is indicating to us today is that the elasticity in unit demand may not be as strong as people think despite the growth of the low cost PC. I think that's the key going forward."
-- by staff and wire reports
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