Leery investors brace for Intel, AMD
Shareholders are hoping earnings from the No. 1 and No. 2 chip makers will provide some calm amid a brewing storm.
NEW YORK (Fortune) -- Anxious tech watchers will tune in with great interest this week to get an early glimpse on the sector as Intel and later Advanced Micro Devices deliver first-quarter results.
Intel (INTC, Fortune 500) and AMD, the world's largest semiconductor manufacturers and the parts makers at the heart of the personal computer and network server industries, will offer a key reading on the health of the technology sector in the face of a withering economy. Worries have been mounting in recent week as other tech bellwethers like Cisco (CSCO, Fortune 500) start belt-tightening and Internet giant Google (GOOG, Fortune 500) show signs of a slowdown. The tech-laden Nasdaq is down 14% this year, more than erasing its 2007 gains.
First up is Intel, which kicks off the tech sector's earnings season after the markets close Tuesday. AMD follows on Thursday.
Investors and analysts are eager to see how the semiconductor drama is playing out - in terms of the global demand for computer chips, their prices, and the ruthless market share battle between Intel and AMD (AMD, Fortune 500). Research firm iSuppli cited various factors related to a weakening economy when it recently cut its growth forecast for worldwide semiconductor sales to 4% from 7.5%.
AMD already waved a white flag of sorts last week when it disclosed that revenue in the first quarter ended March 31 fell 15% from the fourth quarter of last year. The Sunnyvale, Calif.-based company said it would cut about 10% of its staff, or 1,600 jobs, due to weak demand across all of its businesses. On Friday, AMD kicked off the layoffs by booting its chief technology officer.
AMD shares, which were trading as high as $40 a share two years ago, are now trading at $6 apiece. Analysts on average expect AMD to report a pro forma loss of 51 cents a share on revenue of $1.5 billion when it releases first-quarter earnings, according to Yahoo Finance. The company posted a 90 cent loss on $1.23 billion in sales in the same quarter a year ago.
Some analysts are quick to point out that AMD's pain is partly self-inflicted. The company hasn't lived up to investor expectations for sales to new customers Dell and Hewlett-Packard (HPQ, Fortune 500). It's also been late to roll out its upcoming high-performance Barcelona processor, according to Wachovia analyst David Wong.
The Barcelona delay underscores the ongoing challenges the No.2 chip maker faces as it struggles to seize ground on the next crop of cheaper, more powerful chips from Intel, whose latest chips have been a huge success. "AMD's shortfall points to Intel gaining overall revenue share in microprocessors in the quarter," wrote Wong in a recent note to investors.
At the end of the fourth quarter, Intel and AMD commanded about 77% and 23% of the chip market, respectively, according to researchers at IDC. Intel's chip dominance was even more pronounced in the desktop market, where AMD landed Dell (DELL, Fortune 500) and H-P as customers two years ago but has failed to steal much business from Intel as a result.
AMD's failure to chip away at Intel's empire may be the big story in the first quarter, but some analysts say the tug-of-war may turn in AMD's favor come summer. "We expect a slower second half 2008 for Intel coupled with some loss of market share in PC and servers to new AMD products," writes JMP Securities analyst Krishna Shankar.
Overall, analysts on average are expecting Intel to report first quarter adjusted earnings of 25 cents a share on $9.6 billion in sales, compared to 27 cents on revenue of $8.8 billion in the year-ago quarter.
But some analysts remained concerned about the big picture as tech spending typically swoons in step with the economy as corporations and consumers scale back on outlays.
"We continue to remain cautious on the PC market given the weakening US corporate IT spending environment," Merrill Lynch analyst Srini Pajjuri wrote in an Intel preview last week. "Though Intel appears to have gained share during the first quarter, we see no secular reason for share gains to continue and expect market shares to stabilize in the next few quarters."
One potentially ominous sign: If Intel loses sales momentum while winning market share. In other words, gains in the big chip rivalry could mean little if both Intel and AMD are selling fewer chips. 
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