Why Are Analysts Lowering EPS Estimates for Chip Stocks?

Intel (NASDAQ:INTC) will report its second-quarter earnings today after markets close in what is expected to be a dismal report. The PC market has been weak and, seasonally, sales are well below trend, resulting in lowered earnings estimates for many chip makers (NYSE:SMH) including Intel rival Advanced Micro Devices (NYSE:AMD).

Don’t Miss: Inside Intel’s Upcoming Second Quarter Earnings Release.

PC shipments have grown less than 3% over last year as consumers focus on getting the latest tablets and smartphones while putting off upgrading their personal computers. Neither Intel nor AMD have successfully broken into the tablet market, and they are now looking at more competition from companies like Nvidia (NASDAQ:NVDA) and Qualcomm (NASDAQ:QCOM) who are developing ARMs in order to break into the notebook business.

Doug Freedman, an analyst who covers the chip sector for Gleacher and Co. in San Francisco, cut his estimates on both Intel and AMD (NYSE:AMD) for the quarter ending in June as well as the quarter ending in September of this year. Freedman expects Intel’s sales to fall roughly $100 million short of general estimates of $12.8 billion. Freedman also expects Intel’s EPS to increase only 2 cents over the same quarter last year. However, downgraded estimates for September are more of a concern, considering fall is typically a strong season for notebook sales as new college students make their notebook purchases.

Fortunately, Freedman notes that the average selling price of chips is increasing, which could help offset lower sales figures. But AMD (NYSE:AMD) has other concerns, including its search for a new CEO, which has yet to turn up any real prospects in six months. Freedman’s lowered estimates for AMD have the company reporting sales of $1.55 billion in June, a 4% year-over-year decline. His September forecast has AMD reporting $1.63 billion in sales, down from $1.7 billion the previous year.