Updated from 9:46 a.m. EST

Stronger-than-expected sales of its flagship microprocessors will help

Intel

(INTC) - Get Report

finish a very tough year in high style.

News that the giant chipmaker raised its fourth-quarter projections cheered investors, and in recent trading Friday shares of Intel were up nearly 7% to $24.21, boosting most semiconductor-related stocks.

In its regular midquarter update after the close Thursday, Intel bumped its revenue guidance up by 6%. An upward revision had been expected, but most analysts thought it would be smaller, and news that the company is going to cut its inventory by "several hundred million dollars" was a pleasant surprise.

But the chip giant could not deliver the higher gross margins hoped for by investors.

Intel said it expects revenue for the fourth quarter to range from $9.3 billion to $9.5 billion. Gross margins will range from 55% to 57%.

Intel said it continues to make progress reducing the inventory glut that has plagued the company this year. It now expects a net inventory decrease of several hundred million dollars by the end of the December quarter.

In October, Intel told investors to expect fourth-quarter revenue ranging from $8.6 billion to $9.2 billion with gross margins of 56% "plus or minus a couple of points." Intel does not give earnings guidance, but the consensus of analysts polled by Thomson First Call is for a pro forma profit of 28 cents on sales of $8.96 billion in the quarter.

If Intel hits the midpoint of its revenue guidance -- $9.4 billion -- it would represent year-over-year growth of 8% and sequential growth of 11%, which is about 3 percentage points more than what sales usually grow in the December quarter, said Intel's CFO Andy Bryant. "This revenue guidance would yield a record quarter and a record year," Bryant said during a conference call following the earnings update.

Bryant did not discuss business prospects in 2005. But coincidentally, market researcher IDC released its 2005

forecast for the semiconductor industry Thursday, and it calls for a 2% decrease in worldwide sales, compared to a 26% gain in 2004.

Goldman Sachs analyst Andrew Root noted that due to a quirk of the calendar, the first quarter of calendar 2005 will be an extra week long, which takes some of the risk out of estimates for that period. Root also noted that "virtually none" of the upside comes from the company's flash memory business. (Goldman has an investment banking relationship with Intel.)

Similarly, Tai Nguyen of the Susquehanna Financial Group, said "the bear case for Intel's stock is that some investors believe that any economic weakness will dampen demand for PCs and digital consumer devices heading into the first quarter, thereby reversing the company's near-term success in lowering overall inventory levels. " (Susquehanna does not have an investment banking business.)

Intel also commented on a new tax law that allows U.S. companies to repatriate overseas profits at a temporarily low rate of 5.25%, rather than reinvest them overseas. The company said up to $6 billion of earnings from its overseas subsidiaries might be eligible for the lower rate.

"The company is reviewing the matter and does not yet have formal plans regarding the repatriation," Intel said. "The company could accrue charges for the taxes in the fourth quarter and/or future periods depending on the timing of the company's decisions related to the repatriation."

As a result of its own missteps, competition from

Advanced Micro Devices

(AMD) - Get Report

and a general nervousness about the semiconductor sector as a whole, shares of Intel have lost 28% of their value this year, despite a run-up in the last two months.

Earlier this month, market researcher Gartner said the company's smaller rival had once again gained share in the

high-margin market for server chips. Even though Intel's share of that market is much higher than AMD's, its rival's gain was seen as one more sign that Intel is stumbling.

Wall Street had expected Intel to raise guidance for the quarter, but the extra $500 million added to the midpoint of the revenue range was better than expected. There also were some fears that Intel would lower its estimated gross margins, but by keeping the midpoint at 56%, the company was able to clear what was generally thought of as a rather low bar.