NEW YORK (CNN/Money) -
Can Intel be the cure for the market's summertime blues?
The world's largest chipmaker is set to report second-quarter results after the closing bell Tuesday. The numbers should be solid: analysts expect profits to soar 91 percent to 27 cents a share on a 19 percent increase in sales, to $8.1 billion.
But several analysts have downgraded Intel and other semiconductor companies recently because of a concern that tech spending will disappoint. A wave of earnings warnings last week from software developers and a couple of smaller chip firms contributed to that fear.
In addition, Intel has had some high profile problems with its latest chip for personal computers, known as Grantsdale. The company announced a recall of some Grantsdale chips in late June.
As a result, shares of Intel (INTC: Research, Estimates) have fallen more than 6 percent so far in July and nearly 20 percent this year. The shares were little changed Tuesday. Still, the stock more than doubled last year so a pullback in 2004 should be no major surprise.
So is there more downside for Intel, and the rest of tech for that matter, or will second-quarter reports spark another rally?
Eye on guidance and inventory
The answer to this question depends largely on two crucial pieces of data in Intel's report: third-quarter sales guidance and inventory levels.
Analysts expect Intel to post revenue of $8.76 billion in the third quarter, which is typically stronger than the second quarter because it includes the back-to-school computer buying season.
It's been a tough year for Intel investors...
Analysts expect an 8 percent rise in sales from the second quarter.
But if Intel doesn't boost its sales guidance, that could further fuel the belief that the chip cycle is close to peaking. Last year, Intel reported a 15 percent sequential sales increase in the third quarter.
As for inventories, investors panicked when inventories in the first quarter rose 11 percent from the fourth quarter at the same time that its sales forecast was for flat growth.
That raised worries that Intel was building up too much inventory in the face of slowing demand...and that Intel could be left with a glut of chips that it would either have to write-down or sell at a discount.
"If end demand for PCs is not there, inventory would be a concern," said Tai Nguyen, an analyst with Susquehanna Financial Group.
But heading into the third quarter, it's reasonable to expect Intel's inventories to rise since it should post higher sales in the quarter. But Wall Street is hoping for a moderate gain.
"Investors will tolerate a small increase in inventories -- about 5 to 10 percent -- as long as there is an expectation of strong third quarter sales," said Krishna Shankar, an analyst with JMP Securities.
So Intel needs to reassure Wall Street that demand, from both consumers and big businesses, is not about to drastically cool. And that's the biggest cause of debate on Wall Street.
Street getting too negative?
Some analysts think that investors are getting needlessly worried and expect Intel's tone during its conference call to be fairly positive.
|...and all chip stock bulls for that matter.
"People are confusing some of the normal seasonal slowdown we get in June with being some type of secular change in the environment," said Patrick Ho, an analyst with Moors & Cabot.
But Robert Burleson, an analyst with J.B. Hanauer, said that recent signs of weak demand from Taiwanese makers of motherboards are not encouraging.
He adds that the slew of software warnings last week is also a possible indication that corporate tech spending may not be robust in the second half of the year.
Still, Burleson thinks that Wall Street's fears may be a bit overly excessive. And that could actually lead to a short-term bump for Intel and other chip stocks.
"In the near-term, earnings could be short-term catalysts for the stock. Expectations have come down so much that I don't think the news will get any worse," he said.
JMP's Shankar said that while investors shouldn't expect techs to perform as well in the second half of this year as they did last year, when earnings were first starting to pick up in the tech sector, that doesn't mean another bear market is upon us.
"The easy money has been made in many of the semi stocks, including Intel, but I still think some chips stocks have 20 to 25 percent upside left," said Shankar. "This is hopefully the pause that refreshes."
Analysts quoted in this story do not own shares of Intel and their firms have no investment banking relationships with the company.