SAN FRANCISCO, USA: Shares of Intel Corp and other semiconductor makers slid on Tuesday after Morgan Stanley downgraded the sector, warning that inventory was creeping up and revenue growth could peak in early 2010.

Morgan Stanley, which downgraded bellwether Intel to equal-weight from overweight, cast a shadow over growing optimism among investors and executives that a revival in corporate and consumer spending would prop up chip sales.

The U.S. investment bank downgraded the U.S. semiconductor sector to cautious from attractive, saying expectations of a recovery and forecasts of above-seasonal growth may have already been factored into stock prices.

"A lot of good news has been baked in," wrote Morgan Stanley analyst Mark Lipacis. "We can't help but think that PC component suppliers will have a difficult time beating expectations for over the next several quarters."

Still, some analysts continue to foresee revenue growth for chipmakers after stronger-than-expected back-to-school sales, holding out hope for renewed corporate spending on technology in the second half of next year.

But others agreed with Morgan Stanley's more pessimistic assessment, warning that U.S. unemployment may soon rise above 10 percent, depressing consumer sentiment, which has held up well.

"Did 2009 feel good enough to you that Intel revenue should only be down 8 percent?" said Auriga analyst Daniel Berenbaum.

"There is an assumption both among investors and at semiconductor companies that the U.S. consumer will continue to be OK," he added. "That's a bad assumption."

In terms of a corporate refresh cycle, research group Gartner says it expects commercial PC sales to rise 10 percent in 2010 and an additional 13 percent in 2011.

And Intel is expected to profit heavily from it. Wall Street expects the technology bellwether to show fully reported earnings per share of $2.81 for fiscal 2010, compared with an estimated 81 cents for 2009, according to analysts polled by Thomson Reuters I/B/E/S.

Still, Berenbaum said he is more skeptical. His research showed corporate PCs to be newer than the oft-repeated four to five years old. And that, he said, combined with continued concerns about unemployment, raised questions about growth.

NOT JUST THE UNITED STATES

Other analysts argued that while the United States and China -- the world's largest and second-largest semiconductor markets -- are carrying the industry, true global growth has yet to come back.

"The world customer base is now larger than it's ever been in its history," said JMP Securities analyst Alex Gauna, adding that more bearish claims may not take this into consideration.

"I know that the economic recovery is tenuous, but global growth is still very much a secular trend and an opportunity for semiconductors," he said.

While inventory levels have been at historically healthy levels, Morgan Stanley's note said that increased builds ahead of the holiday shopping season and release of Microsoft Corp's Windows 7 operating system have caused inventory levels to creep up.

Additionally, Lipacis wrote, the investment bank expects margins for semiconductor companies to hit their peak in the next year.

Morgan Stanley downgraded chipmakers Altera Corp and Xilinx Inc to equal-weight from overweight, mostly due to weaker-than-expected international demand, even though the two companies are expected to benefit from the recovery.

Memory chipmaker Micron Technology Inc was downgraded as well to equal-weight from overweight, again due to the industry-wide inventory and supply concerns.

Graphics and chipset maker Nvidia Corp was downgraded to underweight from equal-weight, primarily because the company is expected to lose chipset marketshare to Intel, whose competing products will be cheaper.

Intel shares closed down 2.68 percent at $18.50, Rambus Inc, fell 1.25 percent to $15.75, and Nvidia Corp, slid 0.5 percent to $12.01. Xilinx finished off 0.92 percent at $21.55, and Altera fell 1.56 percent to $19.61.

However, shares of Intel arch-rival Advanced Micro Devices Inc closed up 0.87 percent at $4.64, and Micron Technologies rose 1.06 percent to $6.65.

LSI Corp closed 2.73 percent lower at $4.99. (Reporting by Ian Sherr; editing by Andre Grenon; Editing by Carol Bishopric, Gary Hill)