Holiday Cheer Eluding Chips

Flash-memory makers ranked among the third-quarter's high-flyers, with SanDisk(SNDK Quote) and Micron(MU Quote) both handily outperforming Wall Street expectations, thanks to demand for gadgets like MP3 players and digital cameras. SanDisk shares are up 39% since reporting quarterly results last month.

And the cell-phone market continued to be good for chipmakers, with wireless-chip companies like Freescale Semiconductor(FSL Quote) and RF Micro Devices(RFMD Quote) posting strong results.

On the other hand, Altera(ALTR Quote) and Xilinx(XLNX Quote), whose programmable logic chips focus more on infrastructure than on consumer products, turned in uninspiring quarterly results and a bleak outlook.

Consumers are now responsible for about half of all semiconductor purchases, according to the SIA. And with consumer spending continuing to drive the economy, the chip companies that play into the consumer market are getting the biggest benefit.

But in the wake of two devastating hurricanes, soaring energy prices and rising interest rates, it's hard to say how much longer this demand will last or what it will look like come Christmas. For chipmakers, who are effectively two degrees away from the end customer, the guessing game is even tougher: Decisions about the holiday season need to be made in late summer and early fall.

"By the very nature of what they do, they're very inclined to be wrong -- they're the furthest away from the customer," says Whitman. "How can they not have a lower batting average?"

Exhibit A this past quarter was Texas Instruments, which revealed that it was entering the fourth quarter with undesirably lean inventory levels. Having underestimated demand in the third quarter, TI was left with only 57 days of inventory, compared with the 69 days of inventory it carried the same time last year. Meeting a fourth-quarter surge in demand, TI acknowledged, could be challenging.