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April 20, 2011, 2:26 p.m. EDT
By Benjamin Pimentel, MarketWatch
SAN FRANCISCO (MarketWatch) "” Intel Corp.'s surprising earnings beat, which is fueling Wednesday's tech-sector rally, raises a question: Why was Wall Street so wrong on the chip maker's first quarter?
Late Tuesday, the Santa Clara, Calif.-based company reported a first-quarter profit of $3.2 billion, or 56 cents a share, on revenue of $12.85 billion. Adjusted income was 59 cents a share.
Apple reports quarterly earnings after Wednesday's closing bell. Dan Gallagher, George Stahl and Paul Vigna have a preview of what to expect.
By contrast, analysts had expected Intel /quotes/comstock/15*!intc/quotes/nls/intc INTC +6.50% to earn 46 cents a share on revenue of $11.6 billion, according to a consensus survey by Thomson Reuters. Read more on Intel's results.
"Well, we certainly weren't expecting this," quipped Needham analyst Quinn Bolton in a note on Intel.
Analysts agreed that a key reason for the surprise was conflicting views on trends in the personal-computer market.
Recent reports from IDC and Gartner Inc. as well as warning signs from manufacturers in Taiwan pointed to a weakening market, said Williams Financial Group analyst Cody Acree.
"You had those negatives that would I say have typically been leading short-term indicators as to the health of the market," he said in an interview. "When you get a wrapping of it all by the third party [research firms], it becomes less noise and a little more actual."
But then came Intel's surprise: The company said it expects low-double-digit growth in PCs, stronger than recent industry projections.
In a call with analysts, Chief Executive Paul Otellini even underscored the disconnect, suggesting third-party research firms got it wrong because PCs sold through "other channels, especially in emerging markets, are not well reflected in the forecasts of third-party firms until shipments from Intel and its competitors have been reconciled."
The company highlighted the fact that emerging markets, which include such countries and regions as China and Latin America, now make up more than half of Intel's overall business.
UBS analyst Uche Orji also noted that "more than 50% of PC sales are now from emerging markets, making it inherently more difficult to track," adding that "desktops are performing better than expected and with 1/3 of PCs in emerging markets built by white box makers."
White box makers are manufacturers of unbranded PCs.
IDC analyst Bob O'Donnell said many PC chips "end up in small little computer shops, these little PC places that will build you a custom desktop system."
There was another wild card in the quarter.
Intel kicked off the year with bad news by disclosing a glitch in its much-anticipated new PC chip, code-named Sandy Bridge. But the company appeared to have overestimated the impact of the error.
"Management could perhaps be accused of having been too pessimistic in assessing the sales impact from the Sandy Bridge chipset problem," Auriga analyst Daniel Berenbaum said in a note.
Analysts also pointed to what has recently been an unpredictable PC market in the wake of disruptions caused by the global economic downturn.
The PC industry saw a strong first half of 2010, but then struggled through a weaker second half. Acree said manufacturers apparently also "burned a significant amount of inventory" in the second half of the year, partly in anticipation of new products from Intel and Advanced Micro Devices Inc. /quotes/comstock/13*!amd/quotes/nls/amd AMD +3.99% .
Gleacher & Co. analyst Doug Freedman wrote that Wall Street "missed the magnitude of the burn" through the third and fourth quarters of 2010.
"We believe the first-quarter fill was greater than expected as lean channels appropriately built to have adequate stock," he wrote.
But despite Intel's blockbuster quarter, the future direction of the PC market remains unclear.
O'Donnell said IDC now forecasts PC unit shipment growth of 7% in 2011, strikingly lower than Intel's projection for low-double-digit growth.
He said IDC typically adjusts its forecast, but added, "If it's as strong as Intel is saying, why are all the PC vendors reporting challenges in the market?"
Acree of Williams Financial Group echoed a similar point, asking, "Is Intel wrong and what they're shipping into is a channel that will run out of appetite for their products at some point? Or is the PC market healthy enough to sustain this level of activity?"
Benjamin Pimentel is a MarketWatch reporter based in San Francisco.
To polish his company's image into that of a do-gooder, Facebook's Zuckerberg could use a little of the magic of a Frank Capra, writes Jon Friedman.
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