Investors brace for Intel fallout

Andy Grove, the chairman who helped make Intel one of the world's most profitable companies, wrote a book titled "Only the Paranoid Survive."

But now it's time for Intel's investors to be paranoid. Long esteemed as one of the technology sector's bluest blue chips, the stock tanked late today, and the future is uncertain.

After-hours and international investors bailed out of Intel and other semiconductor stocks in evening trading today, as news spread that the world's largest chipmaker issued a third-quarter revenue warning this afternoon.

Intel said revenue for the third quarter is likely to be only 3 percent to 5 percent higher than second-quarter revenue of $8.3 billion. Analysts had been expecting sequential growth of 8 percent to 12 percent, with third-quarter revenue at $9 billion or more.

Intel blamed the disappointing results on flagging demand for its products in Europe. The Santa Clara, Calif.-based company generated about 27 percent of its revenue from European operations in 1999, according to a company spokesman. Intel's chips power more than four out of five personal computers around the world.

Intel, known for having obscenely favorable profit margins, also said it expects third-quarter gross margins to be about 62 percent, down from its previous forecast of 63 to 64 percent.

After a 45-minute trading halt following the company's announcement, Intel shares sank nearly $12 to $49.56--a 20 percent plunge that wiped out about $75 billion in market value. Other large tech companies were swept up in the selling frenzy, with chip stocks hit particularly hard.

At one point in after-hours trading, Advanced Micro Devices was down $3.81 to $23.75; Micron Technology shed $7.25 to $55.25; Cypress Semiconductor lost $3.69 to $41.25; National Semiconductor slumped $2.94 to $40; Texas Instruments declined $3.31 to $54; Applied Materials fell $7.44 to $66.06; JDS Uniphase dropped $4.62 to $98.88; and Teradyne slid $12.69 to $36.50.

The rocky after-hours trading will likely turn into a stormy start for Intel and the broader markets tomorrow. Intel is a member of all three major U.S. indexes: the Nasdaq composite, the Standard & Poor's 500 and the Dow Jones industrial average.

Needham analyst Dan Scovel said the Intel warning wasn't necessarily "catastrophic," but he said the news will likely cause wide ripple effects throughout the technology sector. Personal computer makers are particularly vulnerable, he said.

"Anybody with PC exposure might be guilty by association, because this might indicate that seasonal recovery is slower than expected," Scovel said. Back-to-school and holiday shopping demand usually spark PC sales toward the end of the year, he added.

Spreading the pain Intel comprises a large percentage of assets in several stock funds. Fund Name American Capital   Exchange Matthew 25 Papp America-Abroad Kenilworth Granum Value Papp Focus Rydex Electronics Papp Stock Firstar Stellar Relative   Value A Rydex Technology % 40.31   16.06 14.57 14.40 13.50 13.47 11.76 10.30 10.13   9.51 Source: Morningstar

The news does not bode well for mutual fund owners, either: Intel is in the portfolios of 1,176 mutual funds, and the stock accounts for more than 5 percent of the assets in 127 of those funds, according to the most recent portfolio data from mutual fund tracker Morningstar.

Intel's warning stoked concern among economists and investors that rocketing energy prices and increased energy demand this winter could force consumers to spend money on heat and gas instead of computers, cell phones and other electronic devices.

But Intel's plunge was not wholly unanticipated, nor have investors been uniformly bullish on the volatile semiconductor sector or the broader technology sector.

Of the more than 1,000 global tech stocks tracked by Pip Coburn, senior tech strategist at UBS Warburg, 52 percent have experienced a one-day plunge of more than 20 percent during the past 12 months. Today's Intel warning is just the most recent shock to tech investors, he said.

"The market is in a scared state going into this news," Coburn said. "People are on the edge of their seats and are not getting answers that sound convincing."

Given investors' jitters, Coburn said, the markets will tend to decline. "It's like tipping over a (sleeping) cow...not a lot of challenge."

The Philadelphia Semiconductor index fell 4.5 percent today, extending its loss in the past three months to more than 20 percent. By comparison, the Nasdaq fell 1.8 percent and is down about 4 percent in the past three months.