Semiconductor giant Intel
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
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.