Analyst: Gloom lifting for chipmakers
A leading analyst upgrades investment ratings for Intel and AMD, predicting that corporate upgrades and a continuing increase in IT spending will lift the semiconductor industry.
The ratings upgrades come as Niles is predicting a continued improvement in corporate profits--the drivers of information technology spending--and a need for companies to update hardware once Microsoft curtails technical support for its Windows 98 and NT4 operating systems in June.
That sentiment bodes well for the semiconductor industry, which is expected to post only a slight increase in chip sales of 1.8 percent to $141 billion this year over last year, according to the Semiconductor Industry Association trade group. The industry has been struggling to regain its footing after posting a 32 percent decline in chip sales last year.
Niles upgraded Intel to "overweight," or the equivalent of "buy," from "equal weight," or "neutral." Shares of the chip giant rose 17 cents, or nearly 1 percent, to $21.05 per share in late morning trading on the Nasdaq.
AMD was raised to "equal weight" from "underweight," or a "hold" rating, by Niles. The chipmaker's stock closed down 7 cents, or nearly 1 percent, at $8.93 a share on the New York Stock Exchange.
"We feel demand is continuing to improve and are upgrading Intel again...and also AMD," Niles said in a research report. "First, improving corporate profits should drive increased business investment. Next, the installed base continues to age, with about 180 million PCs over four years old. Last, Win95 enters the end of life on (Dec. 31) and Windows 98 and NT4.x enters the nonsupport phase for Microsoft on (June 30)."
The Lehman Brothers analyst noted he expects Intel to raise its revenue guidance to 4 percent to 6 percent growth, from zero to 6 percent, when it holds its midquarter update Thursday. For Intel's sequential quarterly growth in unit shipments, Niles upped his expectations to the high-single digits, versus his previous estimate of 6 percent.
Niles said he also expects average selling prices for Intel's processors to fall, but to a smaller degree. Prices are expected to decline sequentially by 1 percent to 2 percent in the fourth quarter, compared with his earlier expectations of 3 percent.
"We believe, in (the fourth quarter), that corporate demand is actually doing better than consumer demand relative to expectations," Niles said.
AMD, meanwhile, is also expected to receive the same benefits as Intel from corporate upgrades and increased IT spending. But the feisty competitor will also get an added boost from its flash chip sales, Niles said.
"(We) believe in the near term that improving demand for PCs and flash will drive earnings higher than expected," Niles said.
He added he expects AMD to ship in excess of 6 million processors, with average selling prices up quarter over quarter. Last quarter, Niles estimated the company shipped 4 million processors.