Stocks Chipper Despite Google

Semiconductors lead the way as the Internet search giant's miss doesn't prompt the expected selloff.
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In an encouraging sign for tech bulls,

Google's

(GOOG) - Get Report

first earnings miss was well digested on Wednesday.

Google shares initially plunged 11% from their stratospheric heights Wednesday morning, dragging the tech-heavy

Nasdaq Composite

down 0.6% to an intraday low of 2292. But the Nasdaq rebounded to close in the black at 2310, up 0.2% on the day as Google pared its losses to close at $399, down 7.6% on the day.

The

Dow Jones Industrial Average

, meanwhile, was supported from the get-go by a sharp pullback in crude oil prices and strong earnings at

Boeing

(BA) - Get Report

and

Time Warner

(TWX)

. The Dow finished up 89.09 points, or 0.82%, at 10,953.95, while the

S&P 500

advanced 2.38 points, or 0.19%, at 1282.46.

"It remains a positive story today that Google's disappointment hasn't spilled over to the rest of the market," says Ken Tower, market strategist at CyberTrader. "This is characteristic of a healthy market, and means we can continue to advance for a while."

Google's miss (even if due to a tax revision) might have helped some tech enthusiasts come back to earth. Especially those who hadn't yet sniffed trouble in recent weeks after earnings and guidance disappointments from

Apple

(AAPL) - Get Report

,

eBay

(EBAY) - Get Report

,

Yahoo!

(YHOO)

and from

Intel

(INTC) - Get Report

.

In fact, first-quarter earnings revisions from companies in the tech sector have turned negative for the first time in 12 months, according to Bernstein Research. Analysts also have cut back their estimates, with first-quarter earnings growth for the tech sector now seen at 16% compared with 20% on Jan.1, according to Thomson First Call.

But even after Google's miss, the immediate market reaction didn't reveal signs that investors were going to shy away from the sector just yet. Indeed, one area that fared well throughout the session Wednesday was the semiconductors. The Philadelphia Stock Exchange Semiconductor Sector Index gained 1%.

Besides Wednesday's action, the SOX has been on a tear since the start of the year, rising 12.5% in January, compared with 4.5% for the Nasdaq and 2.6% for the S&P 500.

Semis advanced even though earnings and guidance at industry titan Intel fell short of expectations amid fierce competition from

AMD

(AMD) - Get Report

, which posted strong earnings and guidance.

Several analysts believe that 2006 could be another good year for the stocks of chipmakers. One key reason: After years of underinvestment, corporations seem finally poised to increase spending on information technology (IT). According to Bernstein, IT spending in North America is expected to rise 5.8% in 2006, from 4.3% last year. The gains are more impressive in the Asia/Pacific region, where IT spending is seen rising 11.7% from 8.7%.

Diversified companies that cater to booming demand, especially for wireless handsets in Asia, such as

Linear Technologies

(LLTC)

, should therefore do particular well, according to Bernstein. For Morningstar analysts, those well positioned for Asian growth include

Maxim Integrated

(MXIM) - Get Report

,

National Semiconductor

(NSM)

,

Altera

(ALTR) - Get Report

and

Xilinx

(XLNX) - Get Report

.

Meanwhile, wide-ranging software updates, such as

Microsoft's

(MSFT) - Get Report

new Vista operating system due out in the second half of 2006, should boost corporate PC upgrades, and therefore demand for chips, according to Morningstar analyst Larry Cao.

Ever since the bursting in the tech bubble, firms have been very weary of boosting production ahead of demand, and have therefore been holding back on their own capital expenditures.

"That's been a big change in the semiconductor industry," Vadim Zlotnikov, market strategist at Bernstein said during a conference call Wednesday. "But it means that, as

IT spending should grow, there's plenty of room for

chip orders to grow."

Meanwhile, purchasers of chips, such as PC, wireless phones or LCD TV makers, also have kept their inventories very lean. So lean, in fact, that they are now below normal, says Cao. "As

these firms keep drawing their inventories, this guarantees revenue growth for the chipmakers going forward."

In anticipation of such a turn around, chipmakers such as Intel have been ramping up their own plans to boost spending. According to a recent survey of chipmakers by Lehman Brothers, global spending by semiconductor firms should rise 10% in 2006.

While that spending can still cloud the outlook of Intel, it bodes well for those firms that make equipment for the chipmakers, such as

Applied Materials

(AMAT) - Get Report

,

Novellus

(NVLS)

and

KLA-Tencor

(KLAC) - Get Report

, for instance, stand to gain particularly well from what Lehman analyst Edward White believes will be the first multiyear upcycle in the industry since 1999-2000.

One word of caution, however. Chipmakers often reflect economic expectations way before any other sector of the technology arena. After a downturn in the fourth quarter, U.S. economic growth is expected to rebound, at least in the first quarter. If investors have been bidding up the chip sector in anticipation of this, most of the short-term gains might have already been made.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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