NEW YORK (CNNfn) - A substantial increase in raw materials inventories at networking equipment giant Cisco Systems slammed the stocks of communications and networking semiconductor makers Tuesday.
Investors and analysts are concerned that Cisco's stockpiles of raw materials are so high that its future orders for semiconductors are likely to slow. When Cisco reported its fiscal first-quarter earnings Monday evening, it disclosed that its raw materials inventory rose 335 percent from the fiscal fourth quarter, from $145 million to $631 million.
"We believed that Cisco's results would further magnify the inventory problems facing their semiconductor suppliers -- and they did," said Lehman Brothers analyst Daniel Niles in a research note. "While revenue increased 14 percent from the previous quarter, total inventory increased 59 percent and raw materials increased 335 percent."
"We believe the semiconductor inventory correction is far from over," Niles added.
The Philadelphia Semiconductor Index declined 4 percent, while the Nasdaq composite index remained flat at 3,415.
The semiconductor stocks that were hit the hardest were ones that make chips for high-speed communications and networking products. As examples, PMC-Sierra (PMCS: Research, Estimates) closed down $25.94 at $127.87, a 17 percent decline; Applied Micro Circuits (AMCC: Research, Estimates) finished off $7.50 at $68.87; Broadcom (BRCM: Research, Estimates) plunged $42.50 to $176.50, a 19.5 percent dive; Xilinx (XLNX: Research, Estimates) lost $6.19 to $66.69, Galileo Technology (GALT: Research, Estimates) gave up $4.00 to $24.56 and Vitesse Semiconductor (VTSS: Research, Estimates) dropped $7.31 to $73.06
Integrated Device Technologies (IDTI: Research, Estimates) and GlobeSpan (GSPN: Research, Estimates) were two of the hardest-hit semiconductor makers on a percentage basis. GlobeSpan makes chip sets for digital subscriber lines, which enable high-speed data transmission over existing copper telephone wires. Its stock plunged $17.56 to $50.25, a 26 percent loss.
Integrated Device Technologies makes semiconductors for networking equipment and counts Cisco among its large customers. Its stock plunged $10.69 to $42.25, a 20 percent loss.
Micron Technology (MU: Research, Estimates), a major maker of computer memory chips, was an exception to the downward trend in semiconductor stocks, after being upgraded by Goldman Sachs to "recommended list" from "market perform." Micron's stock has been battered since September because of a steep decline in spot prices for dynamic random-access memory, or DRAM.
"Micron is a beneficiary of the current weaker pricing environment from the standpoint of its relative cost position, market share, and long term profitability as marginal competitors struggle to maintain a current capital base in a weaker pricing environment," said Goldman analyst Joe Moore in a research note issued Tuesday. "Further, while pricing hasn't yet bottomed, investor sentiment is likely near a bottom."
Cisco holds steady
Cisco's stock fared much better than those of its suppliers following the release of its first-quarter earnings, finishing the day up $1.62 at $56.75
For the quarter ended Oct. 28, San Jose, Calif.-based Cisco reported net income of $1.36 billion, or 18 cents per share, versus $814 million, or 11 cents, in the year-ago period. The mean analyst estimate for the quarter was 17 cents per share, according to earnings estimate tracker First Call.
 Cisco -- which makes the routers, switches and access devices that guide data traffic over the Internet -- has topped analysts' consensus estimates by one cent for 13 straight quarters.
The company's revenue in the fiscal first quarter rose 66 percent to $6.52 billion from $3.92 billion. Analysts had estimated that Cisco would report revenue between $6.3 billion and $6.5 billion. The market's muted reaction to Cisco's 66 percent revenue surge shows that investors are concerned about the ability of a company of Cisco's size to continue growing at ultra-rapid rates.
Cisco's sales to telephone companies increased by 8 percent from the fiscal fourth quarter, reflecting weaker demand from competitive local exchange carriers, or CLECs, primarily for broadband access systems. In a conference call with analysts, Cisco's president and CEO, John Chambers, acknowledged that the company faces capital spending challenges from CLECs.
Merrill Lynch analyst Michael Ching raised his revenue and earnings-per-share estimates for Cisco in response to its first-quarter results.
"With balanced demand across geographic regions, customer type and product segments, we are raising our fiscal 2001 revenue estimate from $28.0 billion to $29.4 billion, and now forecast 2002 revenues to grow 40 percent to $41.2 billion. We are also increasing our fiscal 2001 earnings per share estimate to 79 cents from 75 cents, and are establishing a fiscal 2002 earnings per share estimate of $1.05," Ching wrote in a research note.
Lehman Brothers analyst Tim Luke also increased his earnings estimate for Cisco, lifting his fiscal 2001 estimate to 78 cents from 74 cents and his price target to around $65.
"While inventory levels rose in the first quarter, investors are likely to be encouraged that management increased its revenue guidance from the low 50s to the 50-60 percent range, with earnings per share guidance increasing by 2-to-5 cents," Luke wrote in a research note.
Transmeta jumps after IPO
Separately, the stock of low-power microprocessor maker Transmeta closed at $45.25, up 115 percent from its $21-a-share initial public offering price, on volume of more than 26 million shares. Transmeta (TMTA: Research, Estimates) is one of the most widely awaited IPOs on Wall Street this year.
Transmeta was founded in 1995 and spent its first five years secretly developing its product, a new kind of microprocessor it dubbed "Crusoe."
Since it took the wraps off Crusoe last January, the new chip has drawn a substantial amount of interest from potential investors and semiconductor industry execs.
Transmeta's chips differ from competing products in the way they achieve their low-power characteristics. Crusoe chips are designed with a patented technique the company calls "code morphing," meaning they use software to translate the instructions typically handled directly by the transistors on other chips.
Also separately, Pets.com (IPET: Research, Estimates), an online pet-supply retailer that has spent millions promoting its brand, has decided to cease operations.
Known for its sock-puppet "spokesman," made famous by an ambitious television advertising campaign, the company said Tuesday it has begun an "orderly wind down of its operations." Its stock closed down 44 cents at 22 cents. The sock-puppet will be missed. 
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