Chip Investors Skip Town

Updated from 7:49 a.m. EDT

From suspicious stock-option practices to frightening inventory levels, investors have plenty of reasons to run away from chip stocks.

And run they have, as semiconductor companies of all stripes have suffered double-digit dips in their share prices, accounting for some of the biggest casualties in the market's overall slump.

The controversy over backdating employee stock options has battered the likes of KLA-Tencor(KLAC), Vitesse Semiconductor(VTSS) and Brooks Automation(BRKS).

But they are hardly alone.

The correction has hit every corner of the chip sector, from microprocessors to memory, large-cap to small-cap. "Nobody is being spared right now," says Wedbush Morgan Securities analyst Craig Berger.

The Philadelphia Semiconductor Sector index has slipped by roughly 13% since the beginning of May. The Semiconductor HOLDRs(SMH) exchange-traded fund is off 12% over the same period, closing at $33.60 on Tuesday, above its 52-week low of $32.57.

The selloff comes in the wake of a relatively strong batch of quarterly financial reports from chip companies. With the exception of Intel's(INTC) well-known struggles, and even amid stalling desktop PC sales, many chipmakers boosted revenue and profits in the first quarter thanks to the consumer appetite for electronic gadgets such as cell phones and MP3 players.

But a spate of worrisome data points has snowballed in recent weeks, raising fears that the consumer electronics buying cycle, and the chip industry that depends on it, is nearing a peak.

"Consumer spending has been driving a lot of semiconductor growth these last couple years, and people are just worried that with energy prices being as high as they are that consumer spending is going to slow down," says Piper Jaffray analyst Tore Svanberg.

Rising prices of gold and copper -- both ingredients in the manufacturing of semiconductors -- and the possibility that the Federal Reserve will continue to hike interest rates round out the list of macroeconomic concerns that are spooking chip investors.

The view within the chip sector itself is equally troubling.