Cell-Phone Chipmakers Aren't Immune to SARS

"What MOT said on the call was that the slower depletion of excess inventory plus slower uptick [in demand] will hamper their results in the second half. That's why we have an underperform rating on all three wireless chip names [Triquint, Skyworks and RFMD]," he says.

"They're not so overvalued like some of the chip names," he acknowledges. "But the fundamentals are so fragile." His firm hasn't done banking for any of the companies.

On Tuesday, cell-phone king Nokia (NOK Quote) affirmed its previously offered earnings guidance for the second quarter, but the company cautioned that mobile-phone sales growth could be at the low end or even below the prior forecast. The company attributed the revision to ongoing economic weakness in Europe and the U.S., currency fluctuations, and the effect of SARS on consumer spending, especially in China.

Even highly diversified chipmaker Texas Instruments (TXN Quote) will find it hard to escape the Asia fallout. In April, industry sales of digital signal processors -- a market TI dominates -- fell far more sharply than is seasonally typical. Revenues were down 46.4% from the prior month, compared to a five-year median decline of 31.2%, based on data from the Semiconductor Industry Association.

The inventory build and SARS "don't hurt TI as much" as other players that depend solely on the wireless market, says Michael Mahoney, managing director for hedge fund EGM Capital. But, he adds, "I would note that DSP chips are a major source of growth for TI. It's not as big an effect overall, but it could impact an area that's one of the best drivers in its overall performance."

Mahoney says his firm occasionally trades in leading cell-phone chipmakers. He isn't currently long any of the stocks, and EGM doesn't disclose short positions.

China Syndrome

Even before Motorola's comments, cell-phone chipmaker TriQuint, which claims Motorola as its leading customer, warned of trouble last Friday. Possibly foreshadowing broader troubles for the other cell-phone chipmakers, TriQuint lowered guidance for the full year, citing soft demand in Asia for handsets and telecom infrastructure.

But so far, Skyworks and RFMD haven't fessed up to worries of the same magnitude.