Intel buoys tech sector, but some preach caution

SAN FRANCISCO, USA: U.S. tech stocks sprang higher on Wednesday after better-than-expected results and forecasts from bellwether Intel Corp galvanized investors' hopes that an industry recovery was underway.

Investors scrutinizing the battered tech sector for signs of a sustained rebound in demand after a debilitating recession took heart from Intel's forecasting revenue and margins well in excess of Wall Street expectations on Tuesday.

Intel closed up 1.66 percent at $20.83 on Nasdaq, after climbing as much as 4 percent.

Other sector heavyweights also gained as Wall Street breached the 10,000-point watermark for the first time in a year on earnings optimism. Microsoft Corp and Dell Inc both rose as much as 2 percent before Microsoft gave up some of the gains. Chip makers Advanced Micro Devices Inc  and Nvidia Corp led the early rally, leaping as much as 4 percent before giving up some of the gains.

"My expectation is that the Ciscos, Dells, Hewletts, etc., the OEMs and the EMS companies like Flextronics, will have decent numbers," said Miller Tabak & Co analyst Brendan Furlong.

"That's going to help momentum in the technology space continue. It's a sign that end demand has returned."

Worldwide PC shipments rose 2.3 percent year-on-year to 78.1 million units in the third quarter, reversing declines in the first half of 2009, according to tracker IDC.

"(Intel) sets the tone. It sets the pace for semiconductor companies, particularly those with PC exposure," said Oppenheimer & Co analyst Rick Schafer.

Despite Intel's results, analysts said investors remained on tenterhooks following a tumultuous year for tech and the market in general. While many analysts, including Robert W. Baird & Co's Tristan Gerra raised their price targets for Intel, Gerra reiterated his neutral rating.

Others warned that a recovery in hardware and software depends on a resurgence in corporate IT spending, which is unlikely until the middle of 2010.

Specialized chipmaker Xilinx Inc on Wednesday exceeded Wall Street targets, but its CFO said it was too early to call a return to normal sales patterns.

"You might not see as much of a rebound (in sales) as you have seen in the last one or two quarters," said Needham & Co analyst Edwin Mok, foreshadowing a possible slowing of growth for chip companies.

Intel's shares rose nearly 2 percent after analysts raised their price targets for the stock. But its shares are already trading at roughly 31 times forward earnings, compared with a semiconductor industry figure of 17 times forward earnings.

Nvidia late in the day reversed course to close slightly down. No. 3 PC maker Dell closed up more than 2 percent. Microsoft shares jumped as much as 1.5 percent before closing up 0.58 percent.

What, me worry?

Corporate budgets for 2010 are not yet in place. Some analysts held out hope that next week's heralded launch of Windows 7 would kickstart a spending cycle.

"Windows 7 will drive a much-needed corporate refresh in 2010, leading to further revenue growth and substantially higher earnings," wrote Mok, who raised his price target on Intel's stock to $28. UBS also raised its price target for Intel to $27 from $24 after the report, while Lazard Capital increased its target to $26 from $24.

"Valuations for chip stocks look attractive, particularly when you consider we believe there is a positive bias, or an upward bias to earnings," Oppenheimer's Schafer said.

Semi equipment makers like KLA Tencor, Applied Materials Inc might not reap the same benefits.

"It isn't very relevant to the equipment makers," said Caris & Co analyst Benedict Pang. "If you're really talking about the semiconductor equipment stocks . . . it's all with the memory guys, DRAM and NAND. That's really where the recovery has to happen."

Global oversupply has triggered a two-year decline in prices for DRAM and NAND memory which is used in computers, cell phones and digital music players such as Apple Inc's (AAPL.O: Quote, Profile, Research) iPods.

Pang pointed out that Intel's capital spending didn't trough like that of memory makers, and equipment makers have already booked orders for 2009.

The world's top maker of memory chips and flat screen TVs, Samsung Electronics Co Ltd, reported stronger-than-expected earnings last week.

Google Inc, International Business Machines Corp, and AMD are due to report earnings on Thursday.