SAN FRANCISCO (MarketWatch) -- Intel Corp. and Advanced Micro Devices will kick off the technology earnings season next week as more signs point to a chip industry that is emerging from one of the most severe downturns in its history.
Intel , the world's biggest semiconductor company, reports third-quarter financials Tuesday.
AMD , Intel's arch-rival in the personal computer chip arena, reports Oct. 15.
Wall Street recently has been more upbeat about the two companies, which are expected to benefit from two key trends: An improving consumer PC market, and the anticipated uptick in corporate demand as businesses replace aging PCs and servers.
Consumer PC demand has picked up, powered by the growing popularity of netbooks and declining prices. Analysts believe the market is bound to grow even stronger through the coming holiday season.
Although worldwide chip sales fell 16.1% year-over-year in August, for example, sales were up for the sixth consecutive month, according to the Semiconductor Industry Association. SIA President George Scalise cited the growth of the market for netbooks, which, he said in a statement, "have created an important new market segment, filling a gap between 'smart cell phones' and conventional laptop PCs."
"Personal computers have become especially attractive to consumers as average selling prices for PCs have declined by around 14% while memory content has increased by 25% during the past year," he added. "This translates into significantly more computing power at a significantly lower price."
Meanwhile, after putting off information technology spending in reaction to the downturn, businesses are expected to start replacing or upgrading aging PC fleets and servers.
"We should see a bounce in enterprise spending in 2010, as corporations cautiously invest to upgrade aging IT equipment," Lazard Capital analyst Daniel Amir said in a report last week.
Intel earnings to decline
Analysts currently expect Intel to report earnings of 27 cents a share on revenue of $9 billion, according to data from FactSet Research.
That would represent a notable decline from the same period last year, when the company reported earnings of 35 cents a share on revenue of $10.2 billion. The company claimed that it was "the best third quarter revenue in its history."
Amir of Lazard initiated coverage of Intel with a buy rating. In his Sept. 30 report, the analyst said he sees the recovery "moving from a bounce-back in consumer PC purchases in 2009 to an enterprise recovery in 2010."
"We believe Intel is very well positioned to benefit from an upgrade in corporate PCs, with its new Westmere-based chips," he wrote, referring to Intel's new microprocessor.
Noting that server shipments have fallen about 20% in 2009, Amir added, that he expects "a refresh of the aging installed base" over the next 12-24 months.
"Enterprises have been extending the life span of their servers, delaying migration projects and deploying virtualization in x86 servers to consolidate the number of physical servers," Amir added.
And companies can't continue with these extensions and delays indefinitely, analysts say, which is good news for both Intel and AMD.
AMD losses expected to grow
AMD is expected to post a loss of 42 cents a share o n revenue of $1.25 billion, according to Thomson Reuters estimates. That compares with a loss of 11 cents per share on revenue of $1.78 billion for the same period last year.
The Sunnyvale, Calif.-based company has struggled with stiffening competition with Intel and its own financial burdens, especially following its 2006 acquisition of ATI Technologies.
AMD recently spun off its manufacturing faculties, creating GlobalFoundries in a joint venture with the Advanced Technology Investment Co. and Mubadala Development Co., both of Abu Dhabi. Analysts say the move has given AMD much-needed breathing room, turning it into a more financial nimble player.
FBR Capital Markets analyst Craig Berger said AMD's new chips for portable notebooks and servers, AMD is in a position to regain market share against Intel in 2010.
"While AMD's new platforms should not pose a significant threat to Intel's dominance, we do see the potential for a more robust 45-nanometer server based offering, combined with strong product execution, to drive share gains against Intel over the next year," Berger wrote.
He added that the market wants "a robust second supplier (AMD) and will be willing to give this second source supplier business if its product offering is competitive on cost, power consumption, and computational processing power."
More demand from the cloud
Doug Freedman of Broadpoint AmTech noted that increased server demand combines with a growing interest in cloud computing, in which companies access computing power through a network, instead of in-house data centers. This is also expected to help boost chip demand, he said.
"Increases in IT spending appear inevitable to refresh an aging installed base, serve increased cloud/mobility requirements, and/or gain virtualization benefits," Freedman wrote in a note. "Should growth in cloud infrastructure come to fruition as anticipated, we believe both Intel and AMD will benefit materially."
However, Berger of FBR Capital Markets cautioned about potential overheating in the PC supply chain.
"Business conditions are reasonably solid, end-demand appears to be improving, and chip inventory levels remain lean," he said in a note. "That said, there are increased risks that some fourth-quarter PC production has pulled into the third quarter and that the PC supply chain has slightly 'overheated.'"
Berger recently downgraded AMD to market perform, citing the "potential PC build pull-in."
On the other hand, he said Intel "third-quarter trends were robust," adding that for the fourth quarter, "various distributors said Intel CPU [central processing unit] and chipset shipments would grow a bit sequentially."
