Start with two parts

Intel

(INTC) - Get Report

optimism. Add one-part

Advanced Micro Devices

(AMD) - Get Report

aggressiveness. Mix with avid investor enthusiasm. Watch semiconductor equipment maker stocks boil over.

Word this week from the two largest U.S. makers of microprocessors for personal computers that they would increase the amount of money they spend on new equipment and factories this year has pushed the beaten up stocks of companies like

Novellus

(NVLS)

and

Applied Materials

(AMAT) - Get Report

up hefty percentages in just a few days.


The stocks of Applied Materials and Novellus have been on fire in recent days.

But investors might want to substitute a good dose of reality for their mounting fervor.

Personal computer demand has been weak for months and inventories of the chips that go into these PCs have grown to such heights that most industry executives now agree it will take two quarters to work them off. At the same time, the economy is slowing and consumers are getting tighter with their money, raising questions about whether demand will actually pick up after six months. That's when Intel and AMD plan to do some of the spending they're talking about. So all this is raising doubts on Wall Street that the spending will actually happen.

"Those

spending numbers can be adjusted, like earnings," says Dan Niles, an analyst at

Lehman Brothers

. (Lehman hasn't done underwriting for AMD or Intel.)

Cutting Checks

Intel

said Tuesday during its earnings announcement that it would boost capital-equipment spending by 12% to $7.5 billion this year. AMD followed up on Wednesday by

saying it would invest 24% more on equipment and factories in 2001, for a total of $1 billion. The announcements lit fires under the stocks of companies that make and sell the equipment to the chip companies. Novellus closed on Tuesday at $38.75 and is now trading at nearly $45.

KLA-Tencor

(KLAC) - Get Report

closed Tuesday at $37.19 and is now at about $44.50.

Lam Research

(LRCX) - Get Report

finished Tuesday at $20.19 and is now trading near $23. The biggest player in this sector, Applied Materials, closed at Tuesday at $44.44 and is now trading at nearly $50.

The stock increases are a surprise given that the companies themselves are forecasting a pretty dismal 2001, particularly in the first half. Novellus, for instance, said during its Tuesday conference call that both shipments and orders are going to decline in the first quarter and that orders for 2001 will also fall.

Teradyne

(TER) - Get Report

, which makes semiconductor test equipment, said Tuesday that shipments will fall 20% in the first quarter from the fourth and that the first half of 2001 will be slow, followed by a "better" second half. KLA-Tencor said it expects revenue in the March quarter to come in at $570 million to $580 million, compared with the $573 million it booked in the fourth quarter. Applied Materials, which dwarfs other players with its $40 billion market capitalization, doesn't announce earnings until mid-February.

Niles also points out that Intel and AMD don't make up the entire semiconductor industry. Other large semiconductor makers, which are based in Asia, say they are cutting back on capital spending in 2001.

United Microelectronics

, Taiwan's biggest semiconductor factory company, recently told Japan's

Nihon Keizai Shimbun

that it will cut spending by 28% in 2001 to $2 billion.

Big Plans

Intel and AMD have plans, at the very least, to spend big because they are fighting it out for market share.

"Intel and AMD are in a massive dogfight," Niles says. "Intel has to spend money ... and AMD needs to keep up." Intel will spend money to invest in the latest and greatest manufacturing methods -- 0.13-micron process technology (which enables it to produce more powerful processors) and so-called 300 millimeter process technology (this uses larger wafers than the 200 millimeter process and helps cut costs).

AMD has been trying to take advantage of every Intel misstep to gain market share, and it needs more, better, faster to be able to do that. Intel needs to stay ahead. But both AMD and Intel may find themselves having to delay opening their wallets so wide, possibly beyond the year's second quarter and into 2002. So investors betting on the spending are taking a risky position, Wall Street analysts say. Indeed, more negative fundamental news could come from first- and second-quarter earnings reports, which could chip away at the stocks.

But investors seem to enjoy ignoring the gloom and doom. Applied Materials is up a sizzling 31% so far this year. The

Nasdaq

is up 12%.