Intel Sets Up Tech for a Sucker Punch

(Updated to add Intel stock price)

NEW YORK (TheStreet) -- Intel(INTC Quote) sold a lot of chips in the third quarter, but PC sales may lag that pace.

The target-beating third-quarter numbers and a big, fat 60% margin forecast from the largest chip shop Tuesday helped spark a tech rally on hopes that semiconductor demand may be at long last, a real sign of an economic recovery.

Don't bet the house on it, however.

With fingers crossed, PC makers like Dell (DELL Quote) and Hewlett-Packard (HPQ Quote) and more specifically the contract manufacturers like Flextronics (FLEX Quote) and Foxconn that assemble the notebooks and desktops for the industry have been placing big chip orders to gear up for a huge buying cycle.

The surge in demand is great for Intel. But it actually puts the chipmaker on a production pace that exceeds the PC market's projected growth.

Gartner just raised its 2009 PC volume forecast last month, calling now for a 2% decline from 2008 levels. But assuming computer sales can rally and even match 2008 levels, PC shipments could hit 80 million units in the fourth quarter.

The problem is that Intel is on a pace to ship about 90 million processors in that same period, overshooting by 10 million units, says Northeast Securities analyst Ashok Kumar.

On an earnings call with analysts, Intel CEO Paul Otellini said the numbers will look out of whack without strong PC sales.

"I don't think that we can grow much above the PC growth rate at the end of the day," Otellini said on the call. "We need the volume. The PC market has to grow," he added.