NEW YORK (CNN/Money) - The pain may be almost over.

The Philadelphia Semiconductor Index, or SOX, is down more than 20 percent from its mid-January high. Intel is nearly 25 percent off its peak and chip-equipment company Novellus Systems is trading nearly 35 percent below its 2004 summit.

Of course, the SOX soared 76 percent last year and is still up 56 percent from where it was at the end of 2002. But the degree of this year's drop -- especially given extremely strong first quarter earnings reports -- may be a bit extreme.

"I'm not surprised that there is a sell-off but I'm a little surprised at the magnitude of the sell-off," said Patrick Ho, an analyst with Moors & Cabot.

Semis enjoyed a strong run in 2003 but the stocks have been slammed so far in 2004.

Many fears have fueled the dumping of chip stocks. Concerns about rising interest rates is one since semiconductor and semiconductor equipment companies tend to be more capital intensive than other types of tech firms. (For more on why rate hikes shouldn't hurt tech, click here.)

Rising inventory levels at several leading chip companies, most notably Intel, in the first quarter, also lifted some analysts' eyebrows.

But most importantly, investors appear to be worrying that the current chip cycle may already be close to peaking.

Kevin Rottinghaus, an analyst with FTN Midwest Research, thinks that these fears are overdone. He said that chip inventories are slightly higher than normal heading into the second quarter but he thinks that the build is justified since sales of notebook computers and servers should remain robust in the second half of the year.

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With that in mind, Rottinghaus said shares of Intel (INTC: Research, Estimates) and its arch rival Advanced Micro Devices are worth buying. Intel is trading at just 23 times 2004 earnings estimates. Profits are expected to increase 41 percent this year. AMD (AMD: Research, Estimates), which lost money in 2003, trades at 25 times earnings projections for this year.

As for concerns about the cycle coming to an end, Bernstein analyst Adam Parker pointed out in a research note Friday that those worries may be premature since year-over-year revenue growth is expected to remain extremely healthy in the second quarter.

Analysts are forecasting a 17 percent increase in quarterly sales at Intel, for example. Parker said Intel is one of his top picks in the sector.

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His other favorite is Analog Devices (ADI: Research, Estimates), which will report its fiscal second quarter results on May 13. It is expected to post a 32 percent annual increase in revenue.

In addition, Parker wrote that a second leg of a chip rally is still possible this year since the SOX, which has fallen for three consecutive months, has only fallen in February, March, April and May once in the index's history: 1985.

"There is no precedent for all four of these months being weak when fundamentals remain this strong," Parker wrote.

Ho also thinks the talk of an end of the current chip cycle is misguided.

"Investors have been looking for excuses to say the chip cycle is over," said Ho. "But I'd guess that things don't plateau until mid 2005."

He thinks Intel looks attractive and that chip equipment firms Applied Materials (AMAT: Research, Estimates) and KLA-Tencor (KLAC: Research, Estimates) have been particularly oversold. He adds that earnings from AMAT, due out on May 18, could be the catalyst to spark another chip surge.

Analysts are expecting new-order growth for AMAT's next quarter, which ends in July, to be flat to 10 percent higher from the current quarter. But Ho thinks AMAT could boost this guidance, pointing out that big chip firms Texas Instruments and STMicroelectronics have recently increased their capital spending plans for the year.

Ho owns shares of Applied Materials but Moors & Cabot does not have investment banking relationships with any of the companies mentioned. Other analysts quoted in this piece do not own shares of the companies mentioned and their firms do not do investment banking for them.