SAN FRANCISCO Intel Corp (INTC.O) should handily beat forecasts when it kicks off a busy earnings season for the chip sector next week, but investors worry that corporate spending will not rebound until mid-2010.
Investors have bet on a stellar third-quarter for the world's top chip maker, pushing its stock up nearly 25 percent in three months based on resurgent demand in Asia and other recovering economies.
But while consumer spending has lifted hopes for a broad recovery in the $250 billion global semiconductor market, some analysts do not foresee a sustained rebound in crucial enterprise IT spending until well into 2010, despite Microsoft's (MSFT.O) release of Windows 7 later this month.
"When you've got 60 percent of IT technology demand coming from enterprises, a key to the market rebounding is them starting to invest again," said Ragen MacKenzie analyst Taunya Sell. "With the whole Windows 7 thing, that's not going to be as soon as it comes out that enterprises are going to upgrade everything."
Analysts expect chip companies, whose semiconductors and microprocessors are found in everything from PCs, cars and smartphones like Apple Inc's (AAPL.O) iPhone, to report slightly better quarterly earnings this time round, with an eye toward retailers stocking up for the holiday buying season.
Intel, whose microprocessors are found in three-quarters of the world's PCs is considered a bellwether for the tech industry.
It is expected to report earnings of 27 cents a share, excluding items, down from 35 cents a year earlier, according to Thomson Reuters I/B/E/S. Arch-foe Advanced Micro Devices AMD.N is expected to post a loss of 42 cents a share excluding items, down from a year-ago 13 cent gain.
In August, Intel raised its forecast for third-quarter revenue to $8.8 billion-$9.2 billion, spurring a rally in tech shares.
Chipmakers have suffered in the global downturn as demand for electronics crumbled and oversupply triggered a two-year decline in DRAM and flash memory prices, and multiple bouts of factory closures and layoffs.
But there are signs of a sector-wide recovery. Global chip sales posted their sixth consecutive monthly increase in August, according to the Semiconductor Industry Association. Analysts say September chip sales will likely have risen more than 6 percent sequentially on holiday demand, Windows 7, and ahead of China's Golden Week.
The Philadelphia Semiconductor Index .SOXX has gained 26 percent in the past three months.
"Consumer spending on notebooks has been pretty robust and you are seeing a pickup in China and the U.S.," said ThinkEquity analyst Vijay Rakesh.
He added that companies have already begun manufacturing computers for the holiday shopping season, giving chip companies a likely boost.
That reinforces the prediction of Nvidia Corp's (NVDA.O) co-founder Jen-Hsun Huang, who in September said that he believed consumers would continue to lead the market.
"None of us are buying more expensive PCs for our companies, we're buying cheaper ones," said the head of the graphics chip company.
In August, Nvidia said that it expected sales for the October quarter to rise 5 to 7 percent sequentially.
AMD, however, has been struggling to gain market-share from Intel in server, desktop and notebook hardware.
"Cash-flow is really the problem," said Auriga analyst Daniel Berenbaum, pointing to the growth of netbook sales, a market in which AMD doesn't really play.
"They have a partner, who will essentially make sure they won't go out of business... But not going out of business and having a good, sustainable, ongoing, cash-generating business are two different things," Berenbaum said.
Intel Chief Executive Paul Otellini said in late September he thought PC sales would be flat to slightly up compared with a year ago. His comments reinforced forecasts by industry trackers like Gartner, which the same month said it expected worldwide PC shipments to be down 2 percent compared to 2008.
IDC's Bob O'Donnell said investors will need to look at both quarters as a whole because many vendors held back product announcements from the U.S. back-to-school shopping season, opting instead to announce them after Windows 7 is released later this month.
The question now is whether the industry can sustain any upward momentum it has gained.
"The holiday sales season has to be good," said Wedbush Morgan Securities analyst Patrick Wang. "If it comes through and comes in decently, I think we'll be positioned for a pretty healthy cyclical recovery next year."
(Editing by Edwin Chan, Leslie Gevirtz)