Intel, chip stocks slide after M.Stanley downgrade

SAN FRANCISCO (Reuters) - Shares of Intel Corp (INTC.O) and other semiconductor makers slid on Tuesday after Morgan Stanley downgraded the sector, warning that inventory was creeping up and revenue growth could peak in early 2010.

Morgan Stanley, which downgraded bellwether Intel to equal- weight from overweight, cast a shadow over growing optimism among investors and executives that a revival in corporate and consumer spending would prop up chip sales.

The U.S. investment bank downgraded the U.S. semiconductor sector to cautious from attractive, saying expectations of a recovery and forecasts of above-seasonal growth may have already been factored into stock prices.

"A lot of good news has been baked in," wrote Morgan Stanley analyst Mark Lipacis. "We can't help but think that PC component suppliers will have a difficult time beating expectations for over the next several quarters."

But he added: "On the demand side, we've argued that the financial crisis motivated companies to stop spending on IT hardware and there is now pent-up demand for IT equipment."

TROUBLE IN TAIWAN

While inventory levels have been at historically healthy levels, Morgan Stanley's note said that increased builds ahead of the holiday shopping season and release of Microsoft Corp's (MSFT.O) Windows 7 operating system have caused inventory levels to creep up.

Additionally, Lipacis wrote that the investment bank expects margins for semiconductor companies to hit their peak in the next year.

Morgan Stanley downgraded chipmakers Altera Corp (ALTR.O) and Xilinx Inc (XLNX.O) to equal-weight from overweight, mostly due to weaker-than-expected international demand, even though the two companies are expected to benefit from the recovery.