Believe It: This Rally Is Real

I hope you own some semiconductor stock, dear Fool. If you don't, you may be missing the boat right now.

On the heels of encouraging reports from PC makers like Hewlett-Packard (NYSE: HPQ  ) and Dell (Nasdaq: DELL  ) , and a rousing analyst upgrade of Advanced Micro Devices (NYSE: AMD  ) , processor giant Intel (Nasdaq: INTC  ) just raised its guidance for the ongoing quarter.

Already giddy from a tremendous second quarter, Intel was expecting sequential sales growth to $8.5 billion or so, and a hefty gross margin around 53%. Now, management says that "stronger than expected demand for microprocessors and chipsets" is driving sales up to $9 billion, give or take $200 million. And it looks like Intel's sales boost covers a nicely high-end product mix, because the gross margin forecast was narrowed to "the upper half" of the previous range, or 53% to 55%.

To put the new margin expectations in perspective, the third quarter will see Intel's strongest pricing power all year, comfortably at the upper end of the margin range in which Intel has been swimming since the brutal 2006 fiscal year. The low-end but high-margin Atom chip (well, high-margin relative to Celerons, at least) is growing fast in the netbook market, which is helping Intel's margins out a bit. It remains to be seen how average selling prices in desktop, notebook, and server chips might be playing out -- but the Atom line is probably not voluminous enough to move the needle by a couple of percentage points, so chances are that prices are rising across the board.

That's probably why investors didn't only reward Intel with a 4% overnight pop, but also gave competitor AMD a 6% boost: The entire industry is looking good. Computing stocks from Intel to Silicon Graphics (NYSE: SGI  ) are generally up today on a neutral/slightly down day for the Nasdaq and the S&P 500. It's actually hard to find a computer-related stock that hasn't outperformed the broader market over the last six months -- and the tea leaves we're reading today point to continued growth.

Is this a phantom rally, or a sustainable recovery? The good news is plentiful and broad enough that I believe in a rejuvenated computer industry. Feel free to agree -- or not! -- in the comments box below.

Dell and Intel are Motley Fool Inside Value selections. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns shares in AMD and has tremendous respect for Intel, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


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