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Intel (INTC) shares dropped after market hours when the company reported strong revenue but weak margins, and guided for more of the same.

Intel profit drops 39% as price cuts hurt margins

Intel’s gross profit margin, a key measure of profitability, narrowed sharply to 49.6% of sales, from 61.8%. The company has been hurt by stiffer competition from AMD, increased inventory levels and higher start-up costs for new factories using cutting-edge chip manufacturing processes.Intel forecast its gross margin will be around 49% in the first quarter and be around 50% for all of 2007.

Far from being surprising, this is pretty much the expected result of the capacity glut we have seen building for the past year. Intel and Advanced Micro (AMD) were the first victims because of generally weak PC sales and growing rivalry between the firms. Next to go was wireless, which is still in the process of cracking up. Finally, memory has been a strong point but the signs that it will follow suit have been building.

The good news is, a little more scrubbing of the share prices and a little more discipline on the part of the chipmakers can set things up for positive stock moves shortly thereafter.

INTC 1-yr chart:

INTC 1-yr chart

Source: Intel Earnings: No Surprises There