SAN FRANCISCO Strong earnings from Intel Corp (INTC.O) next week should provide further proof of a recovery in electronics and PC demand, but analysts warn the company will have to handily surpass expectations to drive its high share price higher.
Intel, whose chips are found in more than three-quarters of the world's PCs, leads off the quarterly results season on April 13 for a tech sector emerging from a debilitating downturn. Intel had a stellar fourth-quarter in which it posted record margins and it has beaten Wall Street's earnings estimates in five out of the past eight quarters.
Analysts say a strong showing from the industry bellwether will bode well for fellow chip makers and companies that rely on PC demand, such as storage maker Seagate Technology (STX.O) and chip manufacturer Micron Technology Inc (MU.O).
"We're going to see very strong results out of the semiconductor industry in general," said Auriga analyst Daniel Berenbaum. "Demand is better than people expect."
Chip makers, whose products are found in everything from personal computers and cars to smartphones, are emerging from the industry's worst downturn in decades and are expected to benefit from renewed spending by corporations in 2010.
Analysts say Intel will benefit in particular from an uptick in demand for computer servers. Its server chips have increased in speed and efficiency, making them a primary target for purchasing by cash-strapped IT departments, analysts say.
Inventories have been depleted over the past year -- when corporations tightened purse strings -- for parts to machines that power everything from websites to trades on Wall Street.
"Servers have been on fire -- they're en fuego," said Wedbush Morgan analyst Patrick Wang.
But some analysts say much of the chip sector's future growth might have already been priced in.
Since March 16, when speculation began circulating of a stronger-than-expected quarter for Intel, its shares have added 6 percent compared with the Nasdaq's .IXIC 3.6 percent and the Philadelphia Semiconductor Index's .SOXX 3.2 percent uptick.
The world's largest chipmaker is now trading at roughly 13.5 times its expected 2010 earnings, compared with the 12 times of fellow chip heavyweight Texas Instruments Inc TXN.N.
Goldman Sachs semiconductor analyst James Covello suggested there could be a short-term pullback, in line with Intel's average 4.5 percent swing in either direction after earnings announcements.
Endpoint Technologies president Roger Kay said investors will be scouring the results for a reason to sell.
"If they do anything that's not perfect, that's what will happen," he said.
The latest numbers from the Semiconductor Industry Association put worldwide chip sales at $22 billion in February, 56.2 percent higher than the same time in 2009.
Intel is expected to report earnings per share of roughly 37 cents, excluding items, up from 11 cents a year earlier, according to Thomson Reuters I/B/E/S.
An earnings surprise is likely for Intel, according to Thomson Reuters Starmine. SmartEstimate, which places more weight on recent forecasts by top-rated analysts, forecasts Intel will post earnings per share about 1.6 percent above the Street's average projection.
Some analysts fear gross margins have peaked for the semiconductor industry, with cost cuts done with and selling prices, while firm, not rising as fast as investors hoped.
But Broadpoint Amtech analyst Doug Freedman said average selling prices for Intel's chips inched higher in the fourth quarter -- despite the presence of Intel's popular low-cost Atom processor for netbook -- and should hold up as Intel continues to manage expenses adroitly and release new chips.
"Not only has their cost structure gotten lower, but pricing is staying higher," he said.
Another bright spot is China, the world's No. 2 PC market, and the place that accounts for over half of Intel's revenue flow. Indications are pointing to continued robust demand, industry executives say.
Analysts say Intel remains a good long-term tech bet.
"We expect to see margins hold at peak levels," said Robert W. Baird analyst Tristan Gerra. "We're going to see a resumption of units stronger than it's been in years and we expect Intel to gain market share."
Other semiconductor sector companies, especially analog chip companies, are raising prices. Analog Devices Inc ADI.N posted 61.1 percent margins last quarter, expected to rise to more than 63 percent in the fiscal fourth quarter.
Intel's 64.7 percent fourth-quarter gross margin was an all-time high.
"These are things we haven't heard of since 1999 and I think that is going to lead a lot of companies to post a 10-year high gross margin peak, which is going to help the whole group in valuation," he added.
(Reporting by Ian Sherr; editing by Edwin Chan and Andre Grenon)