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Intel stock sees Merced fallout

Tech stocks fall amid a round of downgrades for Intel after it warns of production delays in its next-generation chip.

Technology stocks fell today amid a round of downgrades for Intel after it warned of production delays in its next-generation Merced chip.

The tech-heavy Nasdaq fell 32 points, to 1,747.

Merced, Intel's 64-bit processor, will be delayed about six months, the company announced Friday. The timetable for volume production has been pushed back from 1999 to the middle of the year 2000. (See related story)

Analysts warned that the lost time could have a domino effect on workstation and server manufacturers, such as Hewlett-Packard, Dell Computer, Compaq Computer, which had been planning powerful, high-profit, 64-bit systems based on those chips to make up for the razor-thin margins in low-cost computers.

Dell was among the hardest hit, as its stock fell about 5 percent, to 78.31; Compaq dropped about 2 percent, to 26.81; Intel dropped about 5 percent, to 68. Dell and Intel were among the most active issues on the Nasdaq, with 26.3 million and 27.7 million shares trading hands, respectively.

BT Alex Brown today downgraded Intel from "buy" to "market perform." Cowen & Company downgraded Intel from "buy" to "neutral." Lehman Brothers lowered its 1999 earnings per share estimate on the chip giant to $3.50 from $3.55 and its 2000 estimate to $3.60 from $3.90 a share, but maintained its "neutral" rating. Salomon Smith Barney lowered its 1999 estimate to $3.70 from $4.05 but maintained its "buy" rating on the stock.

Ken Pearlman, an analyst at CIBC Oppenheimer, said that Merced is simply an excuse, and is not the real issue pushing down tech stocks.

"Stocks are not cheap relative to fundamentals, and stocks have not reacted to a downturn in fundamentals," he added. "We are heading into prereporting period and [people are starting to] look at some of the downside issues. For example, billings [for Intel] are down about 18 percent since November, and stocks are playing catch-up."

While Intel's near-term outlook looks bleak, with the company expecting to post flat revenue growth for the second quarter, and its stock trading at the same level it was trading at in January 1997, there are some potential drivers on the horizon for the company whose chips are in 80 percent of personal computers worldwide.

One of the key drivers is the potential associated with increased bandwidth, more computing power, new applications such as video telephony and voice recognition, and the emergence of new interactive consumer electronic devices and video games, Nimal Vallipuram, an analyst at Bear Stearns, said in a report.

Those products will fuel the need for faster processors. Moreover, the market for personal computers should turn around during the second half of 1998 because "the fundamental trends that drive the unit demand for electronic equipment in communications, computer, and consumer end-markets remain intact," Vallipuram said.

Pearlman pointed out that the PC market is seeing slower unit growth, and that there aren't any killer apps or new applications leading users to demand more power from their desktops. He noted that, with the bulk of Intel's business in the low end, cheaper computers are increasing competition among chip makers and putting downward pressure on prices, which can, in turn, hurt earnings.

"There always has been market demand for more performance, and the market isn't demanding that performance as much any more," said Pearlman.

While the fallout from Intel's delay is still unclear, at least one analyst remained bullish on HP because of the company's plans for its PA-RISC processor, which has been the basis of its high-end Unix server strategy.

Gruntal & Company reiterated its "buy" rating on HP, with a 12-month price target of $80. The firm met with the company's management following the announcement of Intel's chip delay, and reported that management said it had anticipated a delay for the new architecture. HP plans to move to the PA-RISC generation before moving to Merced.

Standing apart from the retreating tech stocks today was Sun Microsystems, whose shares gained after Morgan Stanley Dean Witter analyst Tom Kraemer upgraded the company based on potential gains from Intel's woes.

Kraemer upgraded Sun to "strong buy" from "outperform" and raised his 1998 and 1999 earnings estimates on the company to $2.29 a share from $2.28, and to $2.83 from $2.70, respectively. The analyst also set a new price of $57 a share, up from $55.

The delay in Intel's Merced chip is seen as a plus for Sun, which makes high-end processors and computers that eventually will compete with products based on Merced.

(Intel is an investor in CNET: The Computer Network.)