Intel Propels Chip Stocks

An analyst upgrade on Intel rallies the sector.
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A slew of chip stocks stretched to new 52-week highs Friday, after an analyst boosted his rating on


(INTC) - Get Report

and predicted that the PC microprocessor market is set to undergo a significant transformation.

Goldman Sachs analyst James Covello upgraded Intel from neutral to buy on Friday, slapping a $28 price target on the stock.

According to Covello, microprocessor rival

Advanced Micro Devices

(AMD) - Get Report

is planning to outsource most, if not all, of its chip manufacturing next year.

The move, wrote Covello, would benefit Intel more than AMD, because the transition to using contract manufacturers could cause AMD to lose its technological edge.

What's more, AMD's switch to a fabless model would fundamentally change the dynamics of the microprocessor market, Covello said.

"We believe that being the only dedicated capital spender in the

microprocessor market would allow Intel to control future excess capacity more efficiently than in previous downturns, when both Intel and AMD felt the pressure to continue to ramp capacity in order to remain ahead of one another," Covello said.

For the PC microprocessor market,

which has been plagued for months by excess inventory and aggressive price cuts by both Intel and AMD, such a shift would be good news.

The theory about AMD's manufacturing plans, which Covello said was based on discussions he had with companies during a recent trip to Asia, sent Intel shares up roughly 3.3% in midday trading to a new 52-week high of $24.

The news came on a strong day for the broader market, with the




each posting strong gains.

Chipmakers with ties to the PC industry fared particularly well.

Graphics chipmaker


(NVDA) - Get Report

popped 4%, or $1.50, to a new 52-week high of $39.33, as investors appeared to reason that it could also benefit from AMD's outsourcing -- given that AMD owns ATI, Nvidia's main rival in the graphics market.

Nvidia is due to hold its annual briefing with financial analysts next week.



, which makes wireless networking chips for PCs, was up 3.2%, or $1.01, to a 52-week high of $32.56.

The PC market appears to be on track for a healthy second quarter, said Bill Gorman, the vice president of equity research at PNC Wealth Management.

Build rates of PCs among Asian manufacturers look "fairly positive," he said. "There's been some sort of turn in investor expectations that PCs, after a couple of rough quarters, can get to some double-digit growth," said Gorman.

A representative from AMD could not be reached to comment on the reports of its manufacturing plans.

In its most recently ended quarter,

AMD lost $611 million, as it sales and profit margins slumped in the face of fierce competition from Intel.

AMD said at the time that it was considering various "asset light" options that would hand off portions of its chip manufacturing to third parties such as

Chartered Semiconductor Manufacturing


, with which AMD already has a deal.

Moving to a completely fabless model would represent a much more significant change than what AMD discussed at the time. The company currently has two fabrication facilities in Germany and has made plans that give it the option to build a

third facility in New York.

Some investors viewed likelihood of AMD increasingly reaching out to third parties for its chip manufacturing as a natural reaction.

"AMD has the harsh reality of looking at their costs, and these fabs aren't cheap," says Chris McHugh, senior portfolio manager of Turner Investments. "When you're losing as much money as they are, you have to make some tough decisions."

While McHugh doesn't hold positions in either Intel or AMD, he says a move by AMD to rely more on outsourced chip manufacturing would represent another improvement in the investing appeal of the PC microprocessor market.

"I think everything's moving in the right direction," said McHugh.