NEW YORK (CNN/Money) - Intel set the bar pretty high for the fourth quarter when it raised its sales target in early December. On Tuesday, the company cleared that bar with little problem. And that could bode well for tech stocks and the overall market Wednesday.

The world's largest maker of semiconductors posted better than expected sales and earnings for the fourth quarter, thanks to robust sales for microprocessors used in desktops, servers and most notably, its Centrino chipset for wireless notebooks.

During a conference call with analysts, Intel chief operating officer Paul Otellini said that notebooks accounted for half of all consumer PC sales during the holidays.

"Centrino is really powering Intel. Laptops are the big driver," said Eric Ross, an analyst with ThinkEquity Partners.

Shares of Intel (Research) shot up nearly 3 percent in after-hours trading, according to INET. The results could go a long way toward soothing investor concerns from earlier in the day about potentially weak earnings in tech.

Tech stocks took a nosedive Tuesday due to a revenue warning from Intel rival Advanced Micro Devices (Research) and concerns about weak profit margin guidance from STMicroelectronics (Research), another large chip maker.

But Intel's strong fourth quarter seemed to indicate that all is not wrong with tech. To that end, shares of AMD recovered somewhat in after-hours trading. And shares of PC makers Dell (Research) and Hewlett-Packard (Research) both rose modestly as Intel's results paint a pretty picture for PC demand.

The main reason for AMD's warning was weakness in its flash memory chip business, processors used primarily in cell phones and other communications devices. That's a tiny fraction of Intel's overall sales. In addition, it looks like some of AMD's problems were due to a pickup in flash chip sales at Intel. Communications chip sales for Intel rose 32 percent from a year ago.

"Intel's results were impressive given what AMD said. This sends a reassuring signal to the market that PC and server demand is healthy and intact," said Krishna Shankar, an analyst with JMP Securities.

Last year was a tough one for Intel and other chip stocks but Intel's strong 1Q outlook could help the group rally in 2005.

And STMicroelectronics, which is based in Geneva, blamed the weak U.S. dollar for its weaker than expected gross margins since it must translate revenues and costs from dollars back to a strong euro. Intel has exactly the opposite problem. Being a U.S.-based company, it suffers when the dollar is strong. Nearly 80 percent of Intel's sales were generated from outside of North America in the fourth quarter.

More importantly, Intel issued a healthy outlook for the first quarter, saying that sales should be between $8.8 billion and $9.4 billion. The $9.1 billion mid-point is ahead of the Wall Street consensus sales estimate of $8.94 billion. During the conference call, Otellini added that corporate tech spending was picking up and that he expected this trend to continue.

"This is a solid outlook. There's reason to think Intel will start off this year strong," said Rick Whittington, an analyst with Caris & Co.

A strong start would be key for Intel since 2004 was a year that the company, and its investors, would probably rather forget. The stock plunged 27 percent last year as rising inventories, production gaffes, margin declines and questions about whether the company was losing its technological edge to rivals like AMD dogged the company.

Intel's results should erase some of these concerns. Margin erosion remains a bit of a problem. Intel said that gross margins, which measure how profitable a company is after subtracting the cost of sales, should be about 55 percent in the first quarter, compared to 56 percent in the fourth quarter.

But Intel reported that its inventories as of the end of December were $2.62 billion, a nearly $560 million reduction from the third quarter. Investors had been worried that Intel had built up its inventories too aggressively at the middle of last year and would need to either write off a glut or sell off the excess chips at a deep discount.

During the conference call, Intel chief financial officer Andy Bryant said that it did not have to take any charges to write down inventory and that inventories were lower than the company had expected because of stronger than expected sales. He added that current inventory levels were a bit "lower than what we consider optimal."

That could be an indication that Intel intends to built up inventories again, which would be problematic if inventories rise and demand does not materialize. But all signs point to a sustained pickup in sales.

"Investors should be encouraged since Intel can now increase production," said Whittington.

The company also appears to be responding to those who have claimed that it is losing its role as an innovator by pledging to spend much more on research and development and capital expenditures in 2005 than it had in 2004.

YOUR E-MAIL ALERTS Semiconductors and Active Components Intel Computing and Information Technology Earnings or Create your own Manage alerts | What is this?

Intel said it expects R&D spending to be $5.2 billion this year, up 8 percent from 2004. And capital expenditures should be between $4.9 billion and $5.3 billion. The $5.1 billion midpoint of this range is 34 percent higher than the $3.8 billion Intel spent on capital expenditures last year.

Although increased spending could keep a lid on profit margins in the short-term, analysts said the higher outlays on R&D and capital expenditures are a good sign for the future.

"This shows Intel's determination to stay ahead of the pack and invest in next generation technology in order to meet the market's needs," said Shankar.

News of Intel's higher capital spending budget also sent shares of chip equipment firms that sell gear to companies like Intel soaring in after-hours trading. Applied Materials (Research) surged 3 percent while shares of KLA-Tencor (Research), Lam Research (Research) and Novellus Systems (Research) were all up at least 4 percent.

JMP Securities' Shankar owns shares of Intel but his firm has no investment banking ties with the company. Other analysts quoted in this piece do not own shares of Intel and their firms have no banking relationships with the companies.