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Chip slip a blip?
When IBM sneezes it usually means the tech sector gets a cold. Are chipmakers going to take a hit?
April 15, 2005: 12:37 PM EDT
By Paul R. La Monica, CNN/Money senior writer
SOX in the Red: Chip stocks have tumbled during the past 12 months but some analysts think the pain should end soon.
SOX in the Red: Chip stocks have tumbled during the past 12 months but some analysts think the pain should end soon.
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NEW YORK (CNN/Money) – With a slew of earnings from big chip companies to digest next week, should investors be worried about semiconductor firms after IBM's big sales miss?

For now, at least, the outlook for some of the chip companies due to report next week is fairly healthy.

Intel (Research), the world's largest maker of chips for personal computers and servers, is due to report first-quarter numbers on Tuesday and analysts expect the company to post a 15 percent increase in sales and 19 percent jump in profits.

Analysts are forecasting a 10 percent increase in earnings for Texas Instruments (Research), a big maker of chips used in cell phones. And semiconductor equipment maker Novellus Systems (Research) is expected to report an 83 percent jump in earnings per share. Both companies are expected to report Monday.

Yet, Wall Street now has to contend with concerns about a possible worldwide slowdown in tech spending because of IBM's bad news. IBM (Research) mainly blamed weakness in Europe and Japan when it reported disappointing sales late Thursday. But the company also said it saw a general drop in demand for hardware, software and services in March after a strong start to the year.

Many tech companies generate most of their sales in the final month of the quarter so if IBM had problems, chipmakers may have had difficulty completing orders late in the quarter as well.

IBM stock tumbled about 8 percent Friday, dragging the rest of the market with it. The Dow and S&P both fell about 0.5 percent and the Nasdaq composite sank 1 percent. But chip stocks took a particularly hard hit. The Philadelphia Semiconductor Index (Research), which tracks 20 of the largest chip and chip equipment firms, sank more than 2.5 percent.

Intel should still be swell

Still, despite IBM's problems, there may be pockets of strength in chipland. Analysts said Intel should be able to deliver a solid quarter thanks to healthy PC sales.

Tai Nguyen, an analyst with Susquehanna Financial Group, noted that Intel's top rival Advanced Micro Devices (Research) already reported strong sales from its microprocessor unit Wednesday, which should reassure investors.

And according to a report from research firm IDC on Friday, worldwide PC shipments rose 11 percent in the first quarter.

IBM, which is selling its PC division to China's Lenovo Group, did have a weak quarter, with shipments rising just 2 percent from a year ago, according to IDC. But industry leader Dell (Research) reported a 13.6 percent jump in shipments and No. 2 Hewlett-Packard (Research) posted a 10.6 percent gain.

Eric Ross with ThinkEquity Partners said that based on his conversations with suppliers, notebook computer sales were especially brisk in the first quarter. That's a good sign since profit margins on chips for laptops tend to be higher than those for most desktops.

Companies that sell chips to the communications sector may have more difficulties though. AMD, for example, reported disappointing results from its flash memory unit, and announced it would be spinning off the division. Flash memory chips are a key component in cell phones and other wireless devices.

And RF Micro Devices (Research), a maker of chips used in cell phones, warned Thursday that it would report a bigger-than-expected quarterly loss due to inventory problems.

Many chip companies stumbled last year after boosting inventories aggressively in the first half of the year, leaving them with piles of unsold chips after demand for tech gadgets cooled in the second half of the year.

Analysts have been hoping most chip companies had worked through their inventory problems in the fourth quarter but RF Micro's warnings shows some companies haven't.

ThinkEquity's Ross added that increased consolidation in the telecom sector could lead to a temporary slowdown in spending, causing short-term pain for Texas Instruments and Broadcom (Research), which makes chips used in wireless networks and digital subscriber line (DSL) modems. Broadcom is due to report April 21.

Don't flip about seasonal dip

But few on Wall Street seem ready to call the current weakness a sign of a big collapse in tech spending.

According to a report from SG Cowen's semiconductor analysts Friday morning, more than three-quarters of chip companies the firm recently surveyed indicated they expected business to improve over the next 12 months.

"We believe the optimistic tone suggests that respondents view the current industry slowdown as a short-term inventory correction and not a cyclical downturn. This data supports our view of a stronger finish to the year," the analysts wrote.

To that end, Nguyen argued that investors shouldn't get too caught up in the first-quarter results since the period is typically a weak one for chipmakers -- and tech in general. So he thinks the sell-off in many chip stocks presents a buying opportunity.

"Overall, demand seems to be behaving seasonally. It's not strong out there but it's not as bad as the market seems to indicate," said Nguyen.

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Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking relationships with the companies.  Top of page

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