Semiconductor giant Intel (NASDAQ:INTC) rocked the computer chip sector higher this morning after revising third-quarter guidance significantly upward. The company said that while the outlook for communication equipment and the rest of its business remains unchanged, computer processor sales have begun to accelerate and will exceed earlier guidance.

Intel now expects third-quarter sales to range from $7.3 billion to $7.8 billion, compared to earlier forecasts of only $6.9 billion to $7.5 billion, and up strongly from last year's $6.5 billion. Management also increased gross margin guidance by two points, to 56%, plus or minus a few points. The high end of that range represents a level not seen in three years.

The news buoyed others in the chip market, including equipment leader Applied Materials (NASDAQ:AMAT), chief competitor Advance Micro Devices (NYSE:AMD), Lam Research (NASDAQ:LRCX), Atmel (NASDAQ:ATML), and Arm Holdings (NASDAQ:ARMHY). Outside chips, PC leader Dell Computer (NASDAQ:DELL) also rose.

Despite recent gains, many semiconductor stocks are still near multi-year lows, a result of a cyclical industry having just suffered its worst three-year downturn in two decades. Investors applauded Intel's news as sign of a possible turnaround for Intel, the chip sector, and, perhaps, the larger tech economy. If Intel's upbeat forecast does herald a recovery, investors may want to reconsider any bets they've placed against the chip industry. Cyclical upswings can be dramatic and often last at least a few years.

Looking ahead, Intel was previously expected to earn $7.8 billion in fourth-quarter sales, a number that will almost surely need to be bumped up. For the year, its $0.69 in consensus earnings-per-share estimates may rise to at least $0.74 per share. The $28 stock is at 40 times the existing estimate and 25 times trailing free cash flow, in line with the S&P 500's free cash flow multiple. Although pricey-looking, if better times are ahead, the stock could keep rising on arguments that its valuation will become justified as earnings expand.