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Wall Street jittery over Intel price cuts

The chipmaker gets a double whammy from the Street as Lehman Brothers says Intel "plans to detonate a price bomb," and Salomon Smith Barney cuts its earnings estimates.

Intel got a double whammy from Wall Street Monday as Lehman Brothers said the company "plans to detonate a price bomb," and Salomon Smith Barney cut its earnings estimates for the chipmaker.

In a research note, Lehman Brothers analyst Dan Niles said Intel is hatching a plan to regain market share from Advanced Micro Devices, sparking a price war that will hurt earnings. Intel will make its move Aug. 26, he said.

According to Niles, Intel plans to cut prices by 50 percent on its high-end Pentium 4 chip. The chip giant will cut the price on its 1.8GHz Pentium 4 from $562 to $260. And if that cut doesn't work, Niles said there is "an additional 10 percent to 25 percent price cut on Oct. 28."

"For those who thought the price war was already aggressive, you haven't seen anything yet," Niles said.

Niles said Intel will attempt to outdo AMD in the megahertz department and put the Pentium 4 on all desktops priced at $800 and higher. He added Intel will introduce its 1.9GHz chip and quickly cut the price below $300.

But all the price cuts will take a toll. AMD is likely to respond and profits at both companies will take a hit, Niles said.

Indeed, Salomon Smith Barney analyst Jon Joseph trimmed his earnings estimates because Intel prices are "running slightly lower than expected."

Citing price cuts, Joseph cut his third-quarter revenue target on Intel to $6.24 billion from $6.64 billion. He also cut his third-quarter earnings estimate to 8 cents a share from 11 cents a share. He maintained his "buy" rating.

Joseph's estimates put him at the low end of Wall Street. According to First Call, analysts are expecting Intel to post earnings of 10 cents a share on sales of $6.43 billion. On its second-quarter earnings conference call, Intel said sales will be between $6.2 billion and $6.8 billion.

Last week, Intel CEO Craig Barrett said the company is expecting a seasonal improvement in the third and fourth quarter. Joseph also said he expected Intel to show some slight gains, but "expectations for a meaningful back-to-school selling season are rapidly fading."

Intel shares closed at $30.28, down $1.40.