Telecom Growth Concerns Hit Chipmakers

Updated from 3:44 p.m. ET

Slower growth and lighter spending at large communications companies are making their way into the chip sector.

On the back of mounting concerns about growth at telecommunication companies like Cisco (CSCO) several semiconductor analysts came out Monday to ratchet down their near-term expectations for some chipmakers.

The companies affected by these changes don't all make the same kind of chips, but they're experiencing the same type of problems: too much inventory and too little demand, which is expected to hit their bottom lines in the December quarter, if not beyond that. And on Monday, their stocks were suffering.

Altera (ALTR) and Xilinx (XLNX), both of which make programmable logic devices, were off 12% and 18%, respectively, Monday. Specialty chipmakers Broadcom (BRCM) and Cypress Semiconductors (CY) dropped 17% and 10%, respectively.

Dan Niles, an analyst at Lehman Brothers, said Altera and Xilinx will experience only single-digit sequential growth for the December quarter, not the expected 12%. Their chips are used in telecom and networking equipment like routers and hubs.

The lower expectations, Niles noted, are based on slowing demand from distributors like Avnet (AVT) and contract manufacturers like Celestica (CLS). Those contract manufacturers then sell to the major end customers like Cisco. The end result: Lehman shaved earnings estimates for both companies for this year and next. (Lehman has neutral ratings on the stocks and hasn't done any underwriting for either.)

But it's not only the makers of programmable logic devices that are affected by what appears to be an increasingly broad slowdown in telecommunications. Salomon Smith Barney, which in July shook the semiconductor sector with several downgrades, sharply reduced its price target on Broadcom, although it maintained its buy rating and its earnings estimates. In the near-term, Solly analyst Clark Westmont wrote, orders further down Broadcom's supply chain are flattening, and there are concerns about inventory in the digital-cable sector.

For instance, AT&T (T) told cable infrastructure equipment companies last week that it wouldn't accept more equipment deliveries this year, which could affect Broadcom. About half of Broadcom's chip sales come from cable boxes and cable-modem applications. While his earnings estimates for the December quarter should be on target, Westmont wrote that there could be downside for earnings per share in the March quarter. (Solly hasn't done recent underwriting for Broadcom.)

Then there are the specialty chips made by Cypress Semiconductor. These digital and mixed-signal integrated circuits chips are used in networking applications by companies including Nortel (NT) and Lucent (LU). It also makes chips for cellular phones, another area that has been in the news lately as manufacturers warned of slowing demand. Prudential Securities on Monday downgraded that stock to accumulate from a strong buy. (Prudential has done underwriting for Cypress.)

So the programmable logic devices and specialty chips used in large networks are out until the inventory issue and telecom market sort themselves out, and specialty chips used primarily in cable applications look weak.

As Lehman's Niles wrote, there's no place to hide in the semiconductor food chain.

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