NEW YORK (CNN/Money) - Wall Street is eagerly awaiting Intel's fourth quarter earnings report Wednesday, and it's pretty clear that the numbers will be solid.

Analysts expect Intel (INTC: Research, Estimates) to report earnings of 25 cents a share and sales of $8.6 billion, according to Thomson First Call, a substantial improvement from a profit of 16 cents and sales of $7.2 billion in the fourth quarter of 2002.

For the first quarter, Wall Street is forecasting earnings of 28 cents a share and revenues of $8.2 billion, compared to earnings of 14 cents and sales of $6.8 billion in the same period last year.

But Intel -- the number one performing Dow stock in 2003 -- will probably need to report that it expects even higher sales for the first quarter in order for it and other surging semiconductor stocks to keep sizzling.

Intel is up nearly 6.5 percent this year and it more than doubled last year. The Philadelphia Semiconductor Index has soared more than 8 percent so far this year, following a 76 percent gain in 2003.

Michael McConnell, an analyst with Pacific Crest Securities, said continued robust demand for notebook computers will help first-quarter numbers. Intel's Centrino chipset, used to wirelessly connect laptops to the Internet, has been a huge success.

"Notebooks are in the midst of a replacement cycle and Centrino has been the catalyst," McConnell said.

Typically, Intel's first quarter sales are about 5 percent to 10 percent lower than the fourth quarter as demand for computers drops off after the holidays.

The consensus forecast reflects a 5 percent decline, but McConnell is predicting that Intel could generate $8.4 billion in revenues in the first quarter, only 3 percent lower than his estimate of $8.7 billion in fourth quarter sales.

And Richard Whittington, an analyst with American Technology Research, thinks that Intel even has a chance of reporting a sequential sales increase in the first quarter since computer sales have been stronger than expected.

"The doom and gloom scenarios about no growth in PCs this year have given way to expectations of 10 percent growth rates," said Whittington.

Still, investors need to be somewhat cautious. Intel shares fell in early December when the company did not raise the high-end of its fourth quarter sales guidance range in its mid-quarter update.

In addition, Intel announced that it would take a $600 million goodwill impairment charge due to lower long-term growth projections for its wireless communications chip business. Communications was supposed to be a big growth opportunity for Intel.

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Wall Street quickly shrugged off these disappointments. But since Intel did so well last year, the bar has been raised dramatically.

"You have to separate the fundamentals from the stock price. The fundamentals are strong and getting stronger," said Patrick Ho, an analyst with Moors & Cabot. "Having said that, what I'm a little concerned about is that a lot of this is factored into the stock."

And even though times are good again for Intel and the rest of the semiconductor sector, Intel still faces some challenges this year. Whittington said that Intel has to keep an eye on rival Advanced Micro Devices (AMD: Research, Estimates), which has launched 64-bit chips for servers (Opteron) and for desktops (Athlon).

Intel has yet to announce plans for a 64-bit offering for its Xeon chips for servers or for its Pentium line of semiconductors for desktops but Whittington thinks that demand is growing for 64-bit computing and that Intel will have to respond.

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"If we get in to the second half of the year and Intel doesn't have a competitive offering then AMD could encroach on Intel's market share and have a chance to hurt Intel in 2005," said Whittington.

Valuation is also a concern. Intel is trading at 27.5 times 2004 earnings estimates and McConnell said that a reasonable valuation for the stock is between 26 and 28 times estimates. So there might not be a lot of upside left unless Intel gives Wall Street a reason to increase its numbers.

Whittington thinks that will happen. His earnings estimate for 2004 is $1.50, the highest on the Street. The Thomson First Call consensus estimate is $1.24.

But Ho thinks that as the year progresses, sequential sales and earnings growth rates will slow a bit, suggesting that chip company earnings may be coming close to hitting their peak during this cycle. And if that's true, investors will probably start to question just how much they want to pay for chip stocks.

"When sequential growth starts slowing down, that's when savvy investors will have to think about getting out of the chip sector," Ho said.

Analysts quoted in this story do not own shares of Intel and their firms have no investment banking relationships with the company.