Holiday Cheer Eluding Chips

To some analysts, however, such a surprise end-of-year spike in demand seems unlikely, considering that Dell(DELL Quote) cited a weak U.S. market in its recent guidance revision, and electronic contract manufacturers Flextronics(FLEX Quote) and Solectron(SLR Quote) each provided a tepid fourth-quarter outlook.

"Our conclusion is that demand is slowing, while chip companies are increasing production run rates (wafer starts)," First Albany Capital analyst August Richard wrote in a recent note. "Moreover, finished chips will be coming off the assembly lines in the seasonally slower 1Q."

In fact, many chipmakers are ratcheting up production. Taiwan Semiconductor Manufacturing(TSM Quote), the world's largest provider of made-to-order chips, reported that its factories are currently operating at 96% capacity, up from 85% in the second quarter and 78% in the first quarter.

The outcome of such a scenario is a surplus of silicon, which could trigger a slowdown or perhaps even a downturn in the semiconductor industry. As unpalatable as a poor Christmas appears to chipmakers, a New Year's hangover could be even worse.