A lot of attention was focused on Intel's first quarter earnings, which were released yesterday and came in better than expected on all three fronts: revenue, margins and net income. The company reported earnings of $647 million or 11 cents per share on $7.1 billion in revenue at 45.6% gross margins. Sure, expectations had been lowered to a great extent in recent weeks but the focus was on Intel's outlook and what that outlook implied for the rest of the tech sector.

With Intel's stock up more than 32% since its Feb 23rd low of $12.08 and the Nasdaq up over 28% since March 9th, a strong outlook from Intel, which happens to be both a Dow and Nasdaq 100 component, was integral for the rally to continue. Beyond Intel's comments that the PC industry had hit bottom in the first quarter, the company did not offer much in way of guidance. The company expects Q2 revenue to remain flat when compared to Q1. With inventories down significantly in the first quarter (down $699 million or 19% from Q4), the company expects gross margins to be much higher in the second half of the year. The company reduced its headcount by 1,400 in Q1 and net margins are likely  to improve through the rest of this year.

The stock dropped more than 5% after hours on that lack of guidance and there is a good chance that Intel could lead the market lower in the coming days or weeks, especially since this rally appears to be getting a little long in the tooth. Irrespective of how the market behaves, Intel's stock is almost certainly going to head lower on valuation concerns, unless investors decide to focus on the company's comments about PC demand hitting bottom in the first quarter.

Earnings in the first quarter dropped 55% when compared to Q1 2008. If we assume a similar drop in the second quarter of this year (the company expects gross margins in the mid-40s and flat Q-over-Q revenue) and a more optimistic 30% drop in the second half of this year I get a forward P/E of 23.23 on earnings of $3.834 billion for the year. I used a 24% tax rate for the second half of this year as indicated by Intel in its conference call and excluded special items such as the $1 billion Clearwire related write-off in Q4 2008 to come up with the earnings number for 2009. Considering that the forward P/E for other tech giants such as Oracle (ORCL) and Cisco (CSCO) is much lower at 12.66 and 15.07 respectively, I expect Intel to drop significantly.

Our position in Intel in the SINLetter model portfolio closed at a small gain as of yesterday's close but will most likely swing into the red. If you have a short-term horizon, getting out of Intel may not be a bad idea. If you have a longer investment horizon, adding to Intel after a pullback in view of the next cycle is also an option, especially since Intel's dividend yield will go above 4% in the event of a 15% decline in the stock price from these levels.

Voluntary Disclosure: I hold a long position in Intel in my personal portfolio.