Shares of Intel and other technology stocks surged after the top chipmaker trimmed its outlook and signalled the PC industry might be down but is not out.
Intel's recently punished stock jumped yesterday after the company reported second-quarter earnings late the day before. The shares of Hewlett-Packard, Nvidia, Dell and other technology heavyweights also rose.
On Tuesday, the chipmaker, a barometer of the PC industry, cut its 2012 revenue growth forecast to between 3% and 5%, down from a prior forecast of "high single-digit growth”.
"Intel is telling us, yes, things are weak, but it's not disaster weak," said Raymond James analyst Hans Mosesmann. "There had been a school of thought that they could guide down - and they didn't."
Shaky economies in Europe and the United States, and a growing consumer preference for Apple's iPad tablets, have been taking a toll on the PC industry.
Fears that global PC sales could be worse than expected, with emerging signs of trouble in China, have helped push Intel's shares down about 10% since the end of April and prior to Wednesday's rally.
Intel's stock recently traded around 10 times expected earnings. With analysts now reducing their estimates for Intel's future earnings, investors may see that PE ratio as more reflective of the chipmaker's value.
"Once the numbers get cut it allows investors to say: 'I'm more comfortable with the denominator in that PE calculation,'" Mosesmann said.
Last week, tech investors got a jolt when Intel's smaller rival, Advanced Micro Devices (AMD), warned that its second-quarter revenue might plummet 11% compared with the first quarter.
Also on Wednesday, IBM reported its quarterly earnings, with investors watching the tech bellwether for signs of trouble in global enterprise IT spending.
Lower price targets
Analysts from at least four brokerages lowered their price targets on Intel after its earnings report.
Some raised concerns about Intel's inventory levels rising about 9% sequentially for the second quarter.
"While we can't rule out the risk that inventory build represents to gross margins, it is incumbent upon a weaker demand environment than Intel currently envisions; in other words, inventories themselves are not the problem - demand is the primary concern," Citi Investment Research analysts said.
Intel, which said a glut in its Ivy Bridge microarchitecture was the major reason for increased inventory, maintained its 2012 gross margin forecast of 64%.
It also forecast that ultrabooks would comprise 40% of all laptops sold by the year-end.
Analysts at Piper Jaffray believe the company's weaker outlook is also the result of "too expensive" ultrabooks and consumers preferring smartphones and tablets to personal computers.
"We expect lack of excitement in PC clients will drive a mix shift to lower price point notebooks and ultimately pressure gross margin and growth," Piper Jaffray analysts said.
Evercore Partners cut its price target on Intel stock to $26 from $27, while Canaccord Genuity lowered it to $26 from $28. Jefferies & Co reduced its target price on the stock to $29 from $30 and RBC Capital Markets cut it to $30 from $33.
According to Thomson Reuters StarMine, 13 analysts rate the stock "strong buy," 11 rate it a "buy," 25 a "hold" and five have a "sell," with a mean price target of $29.14.
Intel shares were up 3.74% at $26.31 in afternoon trading on Nasdaq.
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