Last night, Intel(Nasdaq: INTC) upped its fourth-quarter sales guidance by about $200 million, or 3%. The company cited higher-than-expected processor sales in Asia. Today, on the heels of this good news, the stock is down about 1% in the early going. What gives?

In a word, valuation. Even with the higher sales guidance, Intel is en route to earning no more than about $0.50 per share this year. At $18.75, the stock trades for a current year P/E of 37.5, or about a 91% premium to the S&P 500's estimated 2002 operating earnings P/E of 19.6.

Intel bulls argue that the current high P/E reflects temporarily depressed "trough earnings." But neither last year's earnings nor next year's prospective earnings provide much evidence that we're in a short-lived trough.

Last year, Intel earned $0.52 in pro forma earnings. This year, as mentioned before, the number is expected to come in around $0.50. And next year, analysts are currently expecting around $0.60. None of these numbers is anywhere close to Intel's 2000 earnings of $1.51, and no one should expect that those bubble earnings will be repeated anytime soon.

People seem to forget that Intel's ability to earn premium margins is dependent upon rabid demand for the latest and greatest chip technology. Throughout the late 1990s, when everyone wanted the fastest Pentium chip possible, Intel was able to earn gross margins consistently above 50% and often around 60%:

    Gross Margin
1995         51.8%
1996         56.0%
1997         60.3%
1998         54.0%
1999         59.7%
2000         62.5%
2001         49.2%
TTM*         49.7%
*trailing 12 months

We're in a period now, however, where the supply of adequate computer horsepower has finally caught up with demand, and thus Intel's pricing power is impaired. It'll take another technology boom equivalent to what happened with PCs in the 1990s before the company sees 55% gross margins again.

Given that no such boom seems at all imminent, Fools would do well not to pay more than a market multiple for Intel. If it becomes clear that the company's 50% gross margins are not going away anytime soon, the stock would be more appropriately valued at 20 times current free cash flow per share of $0.62, or around $12.

At time of publication, Matt Richey was short Intel stock via put options.