Chip giant and investors face rough time

You might think that being the biggest and the strongest would be a pretty good thing - especially when you're a globe-spanning titan like Intel, the computer-chip maker that owns a commanding share of the market for microprocessors.

Unfortunately for investors, however, being the biggest hasn't been very good for Intel over the past year or so and that in turn hasn't been good for the company's stock price, which has plummeted by almost 35 per cent from its high last summer.

That drop has shaved Intel's market value by more than US$55 billion ($86.68 billion), to the point where it is now worth just a little over US$112 billion. Google, the search-engine company that has been public for less than two years, is now worth about 30 per cent more than the world's largest computer-chip company.

Why? The simple answer is that Google is growing and Intel isn't - or rather, the search company is growing relatively quickly and the chip maker is barely growing at all. In the past few quarters, Intel's revenue growth was in the 6 per cent range.

And that excludes the most recent quarter, in which Intel did the opposite of growing - it shrank. Instead of the US$10.6 billion in revenue most analysts had been expecting, Intel reported revenue of less than US$9 billion, 5.2 per cent lower than it brought in in the same quarter a year earlier. It was the first revenue drop in more than three years. And the chip maker's profit was even worse - it fell by 38 per cent year-over-year, the biggest decline in more than four years. On top of all that, Intel's forecast for the current quarter was below what analysts expected.

Who is to blame for all this lack of growth? Many industry watchers laid much of the blame at the feet of Intel chief executive Paul Otellini, but they also note some of the pain comes from its only real competitor in the chip business - Advanced Micro Devices, or AMD.

Although much smaller than Intel, the company has been punching above its weight over the past year or two, and many analysts believe it has taken the lead in several key technology areas. That in turn has helped it win some key customers, and there are signs it could win more in the future.

There are even rumours that Dell might give up its long-held exclusive deal with Intel and start to use AMD.

"I still have my concerns that the company is going to run into some problems in the back half of the year," said Doug Freedman, an analyst at American Technology Research.

He rates Intel shares "hold" and suggests buying AMD.

Some analysts are optimistic that Intel will be able to pick up speed toward the end of the year, as some of its newer chips start to hit the market.

The company is betting it can make headway against AMD in the laptop market, which is where many analysts see the big growth occurring in the future, as mobile workers look for powerful desktop replacements. Although AMD has chips that offer more computing power with less battery drain, Intel is expected to start gaining back some share in that market later this year if it plays its cards right.

At the moment, however, AMD is winning customers with a combination of power and price. And Intel is dealing with slumping sales and a growing inventory backlog that currently stands at about US$3.6 billion.

Instead of growing by a previously expected 6 to 9 per cent or so this year, the chip company now says it expects sales to end the year down by about 3 per cent. Standard & Poor's cut its estimates for profit and sales by a substantial amount, and reduced its rating on the shares to a "sell" from a "hold". Even if sales growth returns to historical levels, analysts said that Intel's profit margins would likely suffer because it is trying to keep its prices low in order to compete with AMD.

Adding a further element of risk is an anti-trust lawsuit that AMD has filed against Intel, alleging that the much larger chip maker has used its market power to restrain its smaller competitor by convincing its customers not to do business with AMD, or by signing them to exclusive contracts.

All in all, it could be a rough northern summer and fall for the chip giant - and for investors as well.