Chip Stocks Get Chopped

SAN FRANCISCO -- Is the latest chip party already coming to an end?

It's been barely six months since business began to pick up at semiconductor firms, following an inventory glut that had stalled sales across the industry.

But an analyst note released Wednesday containing the dreaded words "inventory correction" raised fears that another slowdown is coming.

The Philadelphia Stock Exchange Semiconductor Sector Index, which is comprised of 19 semiconductor stocks, was down 2.4% to fall back to the level it was at before a recent two-week rally.

In his note initiating coverage on Intel(INTC Quote) with an underweight rating, Morgan Stanley analyst Mark Lipacis warned that the December or March quarter could see below-seasonal results.

"Microprocessor unit shipments recently have outpaced PC shipments, raising the risk of double ordering and an inventory correction," Lipacis wrote. He also initiated coverage of Advanced Micro Devices(AMD Quote)and Nvidia(NVDA Quote) Wednesday, assigning underweight ratings to each company.

Intel shares finished down 2.2% to $25.81, AMD shares were up 3 cents to $13.23 and Nvidia lost 4.3% to $35.82.

Morgan Stanley makes a market in Intel shares and has provided the company with investment and noninvestment banking services in the past 12 months.

Lipacis' comments about a looming inventory problem were aimed specifically at the PC microprocessor market, and coming on the heels of Micron's(MU Quote) ugly quarterly earnings report Tuesday, chip firms were swimming against a current of bad news Wednesday.