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Chips Slide on Cell-Phone Fears

Alexei Oreskovic

Chipmakers got another dose of bad news Wednesday when Sony Ericsson warned of slowing sales in its line of mid-range and high-end cell phones.

The news triggered a broad selloff in silicon stocks -- and fed fears that one of the semiconductor industry's key end-markets is falling apart.

Not surprisingly, the hardest-hit names were the chip firms directly tied to Sony Ericsonn, the joint venture of Sony(SNE Quote - Cramer on SNE - Stock Picks) and Ericsson(ERIC Quote - Cramer on ERIC - Stock Picks) that is world's fourth-largest maker of cell phone handsets. Skyworks Solutions(SWKS Quote - Cramer on SWKS - Stock Picks), which counts Sony Ericsson as its top customer, saw its stock sink 89 cents, or 11.5%, to $6.83.

Shares of ST Microelectronics(STM Quote - Cramer on STM - Stock Picks) and Texas Instruments(TXN Quote - Cramer on TXN - Stock Picks), both of which also supply chips to Sony Ericsson, were down 5.4% and 4.7%, respectively.

But the pain was felt across the silicon sector, sending stocks like PC microprocessor maker Intel(INTC Quote - Cramer on INTC - Stock Picks) and storage chip vendor LSI(LSI Quote - Cramer on LSI - Stock Picks) into retreat as well. With Wall Street worried that an economic downturn will pinch sales of consumer electronic products, Sony Ericsson's talk of a "challenging" market for sales of replacement cell phones in Europe, seemed to confirm investors' worst fears.

Two weeks ago, Texas Instruments cut its financial forecast for the current quarter, citing the decision of one unnamed handset company to reduce its production of high-end smartphones in March. Most analysts believe the handset maker TI was referring to is Nokia(NOK Quote - Cramer on NOK - Stock Picks), the world's No.1 handset maker.

Taken together, these two comments suggest consumers are holding off on purchases of the pricey cell phones that double as Internet-browsing devices, personal digital assistants and MP3 players.

"It's safe to say that the growth [of the high-end cell phone market] has slowed down considerably from 2006 and 2007," says Francis Sideco an analyst at research firm iSuppli.

But he notes that the recent sales warnings may not tell the whole story.

Texas Instruments, Sony Ericsson and Nokia all represent one group of players in the cell phone market.

The other big portion of the market is represented by Qualcomm(QCOM Quote - Cramer on QCOM - Stock Picks), which supplies chips to the handset makers like Samsung and LG Electronics, both of which have reportedly set their sights on Europe as a source of new market share this year. And Qualcomm's guidance calls for sales in the current quarter to be roughly flat sequentially, which is better than seasonal, according to Sideco.

"In a market like this, you can't necessarily look at one or two companies to get a feel for the health of the overall market," Sideco says. "You have to look at the overall market."

It's also worth noting that Apple(AAPL Quote - Cramer on AAPL - Stock Picks)recently introduced its iPhone in Europe, offering buyers of high-end smart-phones yet another alternative product to choose from.

In other words, the slowness reported by Sony Ericsson and TI/Nokia may not be a reflection of a weakening market for high-end cell phones so much as natural shifts in share amidst increasing competition.

Investors will get a better gauge of the true state of demand for high-end cell phones next month, when Qualcomm, Research in Motion(RIMM Quote - Cramer on RIMM - Stock Picks) and Apple are due to report results.

In the current market, of course, investors cannot afford to wait for the final confirmation of a demand slowdown.