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Semiconductor earnings expectations rise ahead of Intel report

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Semiconductor stocks have been some of the best performers this year thanks to strong earnings and robust growth. These companies are producing chips that fuel new technologies including Internet of Things, virtual reality and data centers.

This has more than offset the struggles they have witnessed from the weak PC market. Shares of the iShares PHLX Semiconductor ETF, which tracks the performance of U.S. semiconductors, is up 21 percent year to date, while some individual names have boasted gains well over 100 percent.

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For those reasons, this will be one of the more closely watched sectors during earnings season. Analysts are expecting the semiconductors space to build on its recent success and continue driving shares higher. We get a first look at the space this week starting with reports from Intel, Xilinx and Advanced Micro Devices.

Intel is prepared to announce its third-quarter results Tuesday afternoon. It is the first major semiconductor to report this earnings season and will likely set the tone for the rest of the space. Earnings and revenue have consistently improved as the company shifts its focus to high-growth markets. Meanwhile, Intel indicated in its second conference call that PC demand was beginning to gain traction. This is expected to lead to another better-than-expected quarterly report.

Analysts surveyed at Estimize are calling for earnings per share of 74 cents, roughly 12 percent higher than the same period last year. That estimate has climbed 13 percent since Intel's most recent report in July. Revenue for the quarter is anticipated to climb by 6 percent to $15.57 billion, marking a significant improvement from previous reports. Shares are up 8.2 percent year to date but have historically declined into the print.

Like many of its peers, Intel has shifted its focus to rapidly growing markets such as AI, IoT, data centers and security. These segments are expected to be key growth drivers as its legacy business continues to struggle. Client computing revenue was down 3 percent in the second quarter primarily due to a slowdown in the PC market and weak IT spending. Shareholders should remain cautious with regards to the PC market, despite earlier comments about a recovery.

Intel also faces a number of imminent threats that could pressure growth and market share for multiple quarters. Google-parent Alphabet, IBM and seven others have joined hands to take on Intel's Data Center Group. The consortium's impact remains to be seen, but Intel management would be wise to not take it lightly.

Shortly after Intel, Xilinx is scheduled to release its fiscal second-quarter results. Xilinx has been firing on all cylinders due in large part to improving demand in wireless and wired communication segments and greater adoption in the automotive; industrial, scientific and medical; test and aerospace and defense markets. Additional efforts to tap into rapidly growing cloud sectors, mainly 5G, could boost top line growth. Expectations are exceedingly higher that Xilinx will build on its recent winning streak in the quarter to be reported.

Analysts are calling for earnings per share of 56 cents on $577.38 million in revenue, according to the Estimize consensus data. Compared to a year earlier this represents a 17 percent increase on the bottom line and 9 percent on the top. Shares historically decline by 1 percent following an earnings report despite topping expectations in 74 percent of reported quarters.

AMD closed last week with expectations at all-time highs. AMD had been one of the most beaten-down companies consistently playing catch up to Nvidia and Intel. Today, it is one of the fastest growing companies and has become a major player in both the high-powered graphics processing unit and more basic central processing unit markets. Its recent Polaris GPU and Zen processors released this quarter are expected to keep AMD's winning streak alive. These products have received outstanding reviews and come at a more modest price point than any comparable chips.

Meanwhile, AMD is making headway with its partnerships. AMD recently signed a deal with Alibaba to provide the ecommerce giant with GPUs in its cloud services. This provides AMD with a growing presence in a market traditionally dominated by Nvidia. These initiatives have led to investors flocking to the stock and have encouraged analysts to raise estimates for this quarter.

Analysts polled at Estimize are calling for earnings per share of 1 cent, reflecting a 106 percent increase from a year earlier. That estimate has increased 40 percent since AMD's most recent report in July. Revenue for the period is estimated to increase 15 percent to $1.22 billion, marking a second consecutive quarter of positive growth.

Despite upbeat earnings, the semiconductor space faces multiple near term headwinds. They include weak PC demand, exchange rate volatility and macroeconomic uncertainty, particularly in Europe. If these early reports can overcome those obstacles, expect positive results from semiconductors this season.

How do you think these names will report? Be included in the Estimize consensus by contributing your estimates here.