Intel Shows PC Demand Is Ready For The Holidays

It appears as if the tech industry is on track to get their holiday wish - an increase in PC demand.

Intel Corp.'s (INTC) strong results suggest that the personal computer market is recovering faster than many had expected only a few months ago. The results also give hope to the rest of the chip industry that demand could be nearing prerecession levels, assuming consumers continue spending through the important holiday season.

On Tuesday, Intel reported results for the third quarter well above its earlier estimates and Wall Street expectations, helped by a return of back-to-school spending, particularly in laptops and netbooks. For the current quarter, Intel predicted revenue would be 23% better than last year and the highest revenue figure since the third quarter of 2008.

Intel makes the chips that run nearly 80% of the world's computers, so its sales serve as a proxy for demand in the PC industry.

Last quarter's results, and the demand they represent, stand in sharp contrast to the sentiment surrounding the PC market just a few months ago.

When the third quarter began, the average analyst estimate was for Intel to report quarterly sales of about $7.76 billion, which would have been a 24% drop from the year-ago period, according to FactSet Research. Instead, Intel reported $9.4 billion, beating the company's raised outlook in late August for revenue of $9 billion and falling only 8.1% below a year ago.

Of course, the strong third-quarter sales of Intel chips represents PC makers' expectations for hearty computer sales the rest of the year. However, that's never a guarantee. In years past, chip customers have had to cut purchases following a weaker-than-expected holiday season, leading to a tough first quarter for chip makers.

But Intel Chief Financial Officer Stacy Smith said he felt comfortable with the strong guidance based in part on a better-than-expected back-to-school selling season last quarter, and the release of Microsoft Corp.'s (MSFT) Windows 7 operating system later this month is expected to spur consumer demand this year and corporate spending in 2010.

"There are lot of variables at play, but clearly end-demand is definitely happening. The question is can this continue to hold on," said Adam Benjamin, chip analyst with Jefferies & Co. "The reality has set in that this is real. The world is not ending."

In fact, it may be on the rebound. Intel's fourth-quarter outlook for revenue of $10.1 billion not only represents a big jump from the same period last year but reaches levels comparable to the fourth quarter of 2007, before the recession crushed consumer and business spending.

Two years ago, Intel reported fourth-quarter revenue of $10.8 billion. If the company's estimates play out, revenue for the current quarter would be down only 6.5% from that period.

Intel's fourth-quarter outlook, combined with a positive preannouncement from computer maker Acer Inc. (ACEIY, 2353.TW), is a good sign for the rest of the chip sector as well.

The chip industry is notoriously cyclical. Sales are concentrated in the second-half of the year, with the fourth quarter traditionally the most important period as consumers spend for the holidays and businesses finish off their technology budgets.

Continuing improvement in PC demand would help Marvell Technology Group Ltd. (MRVL), Nvidia Corp. (NVDA) and Advanced Micro Devices Inc. (AMD), among others.

As a result, those stocks rose Wednesday. The Philadelphia Semiconductor Index, or SOX, gained 0.5% to 331.66. Intel added 2.7% to $21.05; AMD rose 2.6% to $6.24; Marvell gained 2.7% to $16.43; and Nvidia added 8 cents to $14.04.

-By Jerry A. DiColo, Dow Jones Newswires; 212-416-2155; [e-mail]