SAN FRANCISCO (Reuters) - U.S. tech stocks jumped higher on Wednesday after strong earnings and forecasts from Intel Corp (INTC.O) further galvanized hopes that the beleaguered technology sector’s recovery was underway.
Analysts say Intel’s better-than-expected revenue and margin forecasts for the second quarter and 2010 had heightened expectations for a faster and stronger recovery in everything from computers to software, potentially triggering a sustained stock rally.
Intel, whose chips power more than three-quarters of the world’s PCs, said on Tuesday that business spending was growing again and it was increasing capacity to meet stronger-than-expected demand.
Dell Inc DELL.O, which is highly reliant on sales of PCs and servers to businesses, gained 5.3 percent. Hewlett-Packard Co (HPQ.N), the world’s No. 1 PC marker, ticked up 1.4 percent. International Business Machines Corp (IBM.N) rose 1.7 percent, and software giant Microsoft Corp (MSFT.O) rose 1.2 percent.
“Judging by the stock reaction today, you have broadly higher expectations than you did a day ago, and that’s fairly evident from how the group has moved,” said Auriga analyst Daniel Berenbaum, adding that Intel had helped to set a high bar for the rest of the group.
A slew of brokerages, including Goldman Sachs and Citigroup, raised their price targets for the company and investors responded, pushing Intel shares up 3.3 percent to close at $23.52.
Robert W. Baird analyst Tristan Gerra said the results allayed investor’s concerns that the fourth quarter was the peak for Intel’s gross margins. Now that Intel has said it expects gross margins to remain near all-time highs, Gerra said, it could propel a continued rally for the sector.
Many analysts said that this downturn for the tech industry was different from those of years past, as many companies were able to cut costs and manage inventory much more successfully, allowing for an easier swing back into a recovery.
Wedbush Morgan analyst Patrick Wang said those factors may have helped break the cycle of profit-taking that had followed past tech sector earnings announcements.
“Everyone seems more optimistic this time around,” he said. Although, with Intel’s spectacular earnings, he said expectations will definitely be higher for other major tech companies.
Industry watchers IDC and Gartner said on Wednesday that global personal computer shipments had risen sharply in the first quarter.
Intel reported a 44 percent surge in first-quarter revenue on Tuesday and gave a current-quarter forecast that topped Wall Street estimates.
The blow-out quarter and strong forecast confirmed expectations that the chip industry was slowly, but surely, on its way to reaching pre-recession growth levels after grappling with a two-year downturn, when demand for PCs and consumer electronics crashed.
Of 45 sell-side analysts tracked by Thomson Reuters StarMine, 33 rate Intel a “strong buy” or “buy.” Ten rate the stock a “hold” and two rate it a “sell” and “strong sell.”
Intel forecast a gross margin of 64 percent, plus or minus 2 percentage points, for both this quarter and 2010. Analysts said the 2010 gross margin forecast was conservative.
Barclays analyst Tim Luke wrote that Intel may lift its longer-term gross margin forecast to between 55 percent and 65 percent at its investor day on May 11, since the company beat its target range of 50 percent to 60 percent in the last several quarters.
Luke said Texas Instruments and Broadcom Corp BRCM.O should see a boost from Intel’s stronger outlook, but he did not expect the same degree of margin and sales upside for Advanced Micro, which is expected to report first-quarter results on April 15.
Robert W. Baird & Co said Intel’s 2010 outlook should alleviate fears that margins have peaked, since the forecast was above the first quarter’s 63 percent. Baird analysts raised their price target 15 percent to $30 and repeated Intel was their top large-cap semiconductor idea for 2010.
Lack of competitive pressures suggest Intel will continue to gain significant market share this year, resulting in above-seasonal pricing trends, they wrote to clients.
But other analysts voiced concerns about the seasonal head-winds Intel may face in the PC market. BofA Merrill Lynch analyst Sumit Dhanda raised his price target to $25 from $23, but kept a “neutral” rating, citing doubts about whether Intel can sustain growth in the PC market at above-seasonal levels.
Jefferies & Co, which maintained an “underperform” rating on Intel, said the company faces head-winds from slowing desktop PC growth and its average selling prices will be pressured by the shift to low-end laptops.
Reporting by Ian Sherr in San Francisco; additional reporting by Neha Singh and Manasi Phadke in Bangalore; editing by Tiffany Wu, Gerald E. McCormick and Tim Dobbyn