Jittery Wall Street misread Intel's revenue warning, analysts say

The news from Intel that it expects first-quarter revenues to fall 10% short of prior estimates sent technology stocks into a downward spiral last week, largely on the assumption that a decline in processor sales by Intel forebodes a reduction in PC purchases by end-users. But many analysts say notoriously jittery Wall Street may have overreacted to Intel's warning. PC manufacturers are reducing inventories to streamline their businesses and make way for new products due later this year, but that doesn't mean PC sales will be down,

The news from Intel that it expects first-quarter revenues to fall 10% short of prior estimates sent technology stocks into a downward spiral last week, largely on the assumption that a decline in processor sales by Intel forebodes a reduction in PC purchases by end-users.

Dell Computer's stock closed at $US131.88 today, down $7 from Wednesday's closing price, while Microsoft saw its share price fall $2.25 to $80.06. Gateway 2000, Compaq, Hewlett-Packard and NEC all saw their share value decrease also. Intel's own stock closed at US75.56 today, down $10.87 on Wednesday's closing price.

But many analysts say notoriously jittery Wall Street may have overreacted to Intel's warning. PC manufacturers are reducing inventories to streamline their businesses and make way for new products due later this year, but that doesn't mean PC sales will be down, analysts said.

"I think a lot of people have the story wrong," said Michael Murphy, editor of The California Technology Stock Letter in Half Moon Bay, California. "The same people who were out last year yelling about single-digit growth in PC sales are back again. I expect to see 17 percent growth again this year."

Part of the reason for the inventory reduction is an effort by PC makers like IBM and Compaq to imitate the successful built-to-order model pioneered by Dell, Murphy said. Dell keeps inventories at a minimum and orders components more or less as needed in order to keep profit margins higher.

Analyst Roger Kay of International Data Corp. agreed with Murphy, but also said that PC makers in the fourth quarter of last year were guilty of "stuffing the channel" -- in other words, delivering more PCs to retailers than they expected to sell. "Hints from contacts in the channel suggest there's a lot more inventory out there than there should be," Kay said.

"PC makers work on an accrual basis," agreed Dan Hutcheson, president of VLSI Research Inc. "They'll put [a PC] into the retail channel and count it as sold. It's a way of meeting their numbers."

Makers of components like semiconductors and disk drives are most likely to be affected by reductions in PC makers' inventories, Murphy said, adding that he expects other component makers to issue similar reduced-revenue warnings in coming weeks.

IDC recently upped its estimate for unit shipments of PCs in the U.S., from 12.4%last June, to 15.1% in December. "I think for the year we're still basically on track," Kay said.

In a conference call for industry analysts held yesterday, Dell asserted that PC sales are as strong as ever for the time of year, Murphy said.

Other factors that may have affected Intel's reduced orders include new products expected in the near future, which could have persuaded consumers to delay making purchases. Intel itself is due to deliver new Pentium II processors aimed at low-end PCs later this year, and Microsoft's Windows 98 operating system is rumored to be debuting in April.

In addition, downward pricing pressure from OEMs trying to meet the sub-$1,000 price point may be adversely affecting Intel's revenues, Kay said.

Still, since Intel provides the processors for some 95%of all PCs shipped, any reduction in the company's predicted sales is perceived as an industrywide problem, Hutcheson said. "They're pretty much the bellwether company," he said.

Perhaps most worrisome to investors was Intel's apparent inability to explain the drop in orders. "We don't really know yet how to fully account for it, but just in general we're seeing slower demand than we thought," said Intel spokesman Tom Waldrop.

Orders were down especially in the US and Europe, he added, while sales in Asia remained strong despite the financial problems affecting markets there.

Despite the lowered revenue expectations, Intel said Tuesday it still plans to increase capital spending for the year to about $5.3 billion, up from $4.5 billion in 1997, a sign the company does not see the problem as a long-lasting one, Murphy said.

Intel, in Santa Clara, California, can be reached at http://www.intel.com/.

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