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With Nasdaq yielding the exceptionally high return of 3.6% since the beginning of the year against less than 1% for all the other indices, the index will face its first test this week as the results season by the big technology companies gets underway. Three sector leaders are first in line: Intel Corp. (NASDAQ:INTC) will set the ball rolling today [January 16] with its report after the bell, followed tomorrow by Apple Computer Inc. (NASDAQ:AAPL), and then IBM (NYSE:IBM) on Thursday. IBM is not listed on Nasdaq, but its results and guidance could affect the entire Nasdaq technology sector.

Investors want Intel to prove that Advanced Micro Devices Inc.’s (NYSE:AMD) profit warning related to that company only and not the entire sector, while Apple, whose stock is cruising at an all-time high, will be expected to provide the same kind of pyrotechnics in its results and guidance as it does in its product launches. IBM too will be expected to unveil strong results that will justify the stock’s climb above $100 last week for the first time in three years.

Last Friday, investors treated the AMD warning as a local incident, and as result, the stock lost 9.5% while rival Intel gained 1%. According to Bear Stearns, the event that led AMD to issue its warning was the price war for server microprocessors that Intel recently imposed on it, since AMD had the highest gross profit on these -- they accounted for 28% of total gross profit in H1 2006.

The server microprocessor niche was the front AMD chose when it decided to go head-to-head with Intel two years ago. It managed this quite well up to Q4, and even took significant market share from its rival. AMD duly took the road north in the summer of 2005, reaching a high of $42 in January 2006, while Intel plummeted from $29 to a low of $16.75 in June 2006. Intel did not give in, though, and soon counterattacked with its own range of new microprocessors and an aggressive cost-cutting campaign that had beaten AMD by the time Q4 arrived.

Anxious to hold onto its market share, AMD also had to cut prices, triggering an increase of $100 million in Q4 sales but a nosedive in underlying profit. As a result, Bear Stearns drastically cut its EPS estimate for AMD to $0.08 from $0.25, with an even more painful cut for 2007 as whole -- down to $0.41 from $1.19 before the warning.

For its part, Intel is likely to post EPS of $0.25 on $9.45 billion sales in Q4. As regards guidance for Q1 2007, the analyst consensus estimate stands at EPS of $0.23 and $8.94 billion in sales. Strong sales of server microprocessors and, of course, laptop processors, including the new range launched in 2006 by Apple, which was one of the big hits in the recent holiday season, are more than likely to compensate for weak sales of desktop microprocessors.

There are those who believe the launch of Vista, Microsoft’s new version of Windows, which will be available to retail customers on January 30, could cause Intel to surprise the market with higher-than-expected guidance. But with or without Vista, Intel is Citigroup’s preferred chip stock for 2007.

Citigroup feels the company’s restructuring, improved product mix, launch of the “Santa Rosa” laptop microprocessors in Q2, and potential for a better price environment as a result of improved production capacity in the industry this year are all likely to make Intel stock one to watch in 2007. Citigroup also thinks Credit Suisse’s aggressive downgrade for Intel to “Sell” at the beginning of the month will increase the element of surprise once Intel proves that it is back on form.

INTC 1-year chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007. Republished on Seeking Alpha with full permission.

Source: Intel Results: NASDAQ's First Test of the Year