Intel's Expected Revenue Weakness Might Be Contagious

Intel (INTC) cut its guidance for third-quarter revenues yesterday, citing a mix of good news and bad. The news signals underlying trends in technology sales that could weigh on companies beyond Intel. Apart from weakness in other chipmakers, the trends are likely to affect some software makers like Microsoft and computer manufacturers such as Hewlett-Packard (HPQ) and Dell (DELL).

Intel attributed its weaker revenue expectations to lower consumer PC purchases, while it said corporate spending is holding solid. It expects "third-quarter revenue to be $11 billion, plus or minus $200 million, compared to the previous expectation of between $11.2 and $12 billion."

The chipmaking giant added its "expectation for third-quarter gross margin is now 66%, plus or minus a point, lower than the previous expectation of 67%, plus or minus a couple of points. The impact of lower volume is being partially offset by slightly higher average selling prices stemming from solid enterprise demand." Initially, Intel's stock rose on the news, up over 1% to $18.37, but during the day it fell to a new 52-week low at $17.81. The 52-week high for the shares is $24.37.

Rippling Outwards From Intel

And the numbers could get even worse, particularly in the fourth quarter now that the U.S. economic recovery appears to be slowing down. The Commerce Department revised second-quarter GDP downwards to 1.6%. Some economists do not expect much better than that in the second half of the year amidst growing concern about a double-dip recession.

The ripples from the Intel news and the growing threat from slowing hardware sales will almost certainly hit three sectors. The first is chips. Intel's two primary competitors, AMD (AMD) and Nvidia (NVDA) are likely to suffer. Nvidia's stock is off 48% year-to-date, which makes it the second-largest loser among all S&P 500 stocks.

The improvement in Microsoft's (MSFT) sales could also begin to stall. Windows 7 sales have been critical in the turnaround for Redmond's fortunes from last year. Slowing Windows 7 sales would not only hurt the company's earnings, it would confirm some investors' fears that Microsoft is no longer a growth company.

PC sales weakness will be felt most at Hewlett-Packard (HPQ) and Dell (DELL). Dell has more at risk because it's less diversified than HP. A drop in sales would add to a long list of woes at Dell, which include SEC investigations about accounting fraud and bribery, and the release of court documents that allegedly show the company shipped millions of flawed PCs that some Dell employees knew about.

Intel's announcement goes beyond Intel. It's likely to be the beginning of a domino effect.