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On Friday, Intel (INTC) shares declined after the company issued a revenue warning for its fiscal third quarter. With shares down 3.6% on Friday to $24.19, Intel closed at its lowest level since the early days of January. The real question is, with Intel shares already weak into this warning, was it mostly priced in or is there further room to fall?

Let's first look at what Intel had to say. Intel said that it now expects revenues to come in around $13.2 billion for the quarter, plus or minus $300 million. That compares to the previous guidance of $13.8 billion to $14.8 billion. The company also lowered its gross margin forecast to 62%, plus or minus one percentage point, from a previous estimate of 63%, plus or minus a few percentage points. The company stated that expectations for research and development spending, plus general and administrative expenses, along with depreciation expense, would not be affected. The company stated that full year capital spending would be at the lower end of its $12.1 billion to $12.9 billion range, as "the company accelerates the re-use of existing equipment to the 14nm node."

The following quote from the company describes the issues it is currently facing that led to the warning:

Relative to the prior forecast, the company is seeing customers reducing inventory in the supply chain versus the normal growth in third-quarter inventory; softness in the enterprise PC market segment; and slowing emerging market demand. The data center business is meeting expectations.

Now, this warning does not come as a total surprise. As I detailed back in June, analysts had already started cutting their Q2 and full year forecasts, believing that Intel would take down its full year guidance when it reported Q2. After Q1, Intel's revenue forecast for the year called for 7% to 9% revenue growth. When Intel reported Q2 results, Q2 revenues missed expectations. Also, the company gave guidance for Q3 that was lower than analysts were expecting. Friday's warning comes after guidance that was already below analyst expectations. Intel at the Q2 report lowered its full year guidance to 3% to 5% revenue growth. Given their lowered forecast for Q3, you are now looking at approximately flat to miniscule revenue growth for 2012.

Because Intel's warning was just a few days ago, most of the analysts covering Intel have not officially reduced their revenue forecasts yet. Currently, the average analyst estimate is for Q3 revenues to be $13.77 billion, a bit above the $13.2 billion Intel guided to for a midpoint. You can expect the analyst average will trickle down to that area over the next few weeks. When that happens, the full year forecast will come down as well. The current analyst average estimate is for 1.3% growth. That will come down, close to zero, or possibly negative, if analysts believe this is more than a one quarter issue.

Now, before I get into my analysis about Intel's stock price, I must mention the huge impact this will have on other names in the space. Citi's Glen Yeung believes that this warning is evidence of a second half disaster for the PC industry, the worse second half since the inception of the PC. Young believes that economic weakness is one factor, but the confusion over Microsoft's (MSFT) Windows 8 arrival is to blame as well. Yeung also states that competition from tablet computers, especially Apple's (AAPL) iPad, is eating into the PC market.

The Windows 8 launch was supposed to be huge, not only for Microsoft, but for the PC makers as well. However, shares of both Dell (DELL) and Hewlett-Packard (HPQ) hit new 52-week lows after their respective earnings reports, as they both provided weak guidance. I've noted that it's not just PC weakness and tablets taking away PC sales, but Apple had a Mac refresh in June. Consumers may in fact be purchasing more Apple computers, like the MacBook Pro with Retina Display, especially before the Windows 8 release.

For that reason, I've argued that Apple is the best name in this space to be in. Ignoring the iPhone for this argument, Apple appears to be taking market share away from names like HP and Dell in the computer area, and the iPad is the biggest name in the tablet space. In fact, Apple is expected to launch a mini-iPad in the next month or so. Even though Dell and HP both are paying dividends currently that yield about 3% annually for each, I don't think you should be in those names. If Intel is warning that the PC industry is weak, don't buy the PC names. I'm a little more bullish on Microsoft at this point, but that has more to do with a few of their other product lines right now.

So where does that leave Intel? Well, shares are already near their lows for 2012. With the fall in share price, Intel's dividend is now yielding 3.72% annually, the highest yield of any of the major tech names. But that's not comforting for investors who have seen this name drop nearly $3 in a month. There are two levels I currently would watch. The first is the 4% dividend yield, which would be reached if the stock drops below $22.50, about 7% below the current level.

The second has to do with earnings valuation. A few weeks ago, I stated that I was comfortable with Intel shares trading at an 11 times 2012 earnings valuation. Given the reduced growth forecast, I think that 10 times is a more appropriate valuation now. With analysts currently expecting $2.29 in Intel earnings this year, that leaves $22.90 as the current price to get in at. However, like I said, many analysts have not had their chance to revise their forecasts. They will most likely be cutting Intel earnings forecasts for this year, and probably next year as well. I would not be surprised to see the average analyst earnings estimate drop to $2.20 to $2.25, and if you use that valuation I mentioned, that puts you at or slightly below that $22.50 level. That implies that there is still likely some downside remaining in these shares, especially if Intel guides lower again when it reports Q3.

Intel's warning was not a good sign for the company and for the PC industry as a whole. The stock fell nearly a dollar on Friday, and is now down about $3 over the past month. However, as analysts continue to lower their forecasts, investors could see further downside if the valuation compresses. I don't see Intel dropping to $20 anytime soon, but I would not be surprised if shares lose another dollar or two over the next two months (including earnings). While some of this warning may have been priced in, Intel shares could go lower, and don't forget, that will affect other names in the PC space as well.

Source: Intel's Warning: Priced In Or Going Lower?