Chipping Away: Downturn Chisels Telecom, Semiconductor Stocks

The economic downturn took another swipe at the chip sector Friday, sharpening its scythe on the telecommunication-related companies and whatever else was in the way.

Motorola (MOT Quote), the telecommunications company that also makes semiconductors, on Friday morning lowered its estimates for semiconductor growth and for the cellular phones that use those chips. That, combined with a rough outlook from server giant Sun Microsystems (SUNW Quote), pushed down Texas Instruments (TXN Quote) and more general chip companies like Intel (INTC Quote).

Instead of the worldwide semiconductor market growing 10% to 15% this year, Motorola now sees growth that's at best flat and possibly down compared with 2000. One reason for this is that it expects worldwide sales of fewer than 500 million cell phones in 2001, down from the low end of 525 million to 575 million. And with the bottom still falling out of the market, Motorola says it's looking at the possibility of an upturn in the third or fourth quarter.

Motorola's outlook is a mild ding in the second-half rebound theory that many chip companies were espousing earlier this quarter. The theory holds that a miraculous recovery in the second half will offset at least in part the dismal first two quarters. If the upturn comes late in the third quarter or in the fourth, that won't happen. But as related technology companies have come out with worsening outlooks for 2001 -- as Nortel (NT Quote) did last week -- Wall Street has started putting aside this theory and looking to 2002 for chip growth. That's bad news for the chip companies already struggling with the rapidly deteriorating climate, and for their stocks.

For instance, also getting hit Friday was Micron Technologies (MU Quote), which is suffering due to declining prices of DRAM, or dynamic access random memory. Communications chip companies like PMC-Sierra (PMCS Quote) can't seem to be facing enough bad things in their market and also were down. Meanwhile, companies that make the equipment used to build chips, like Applied Materials (AMAT Quote), were falling.

Texas Instruments, which makes the chips that go into cell phones and other telecommunications systems, clearly is struggling with the same problems as Motorola. The Dallas-based chipmaker says it will cut production at five factories between now and the second quarter's end. It'll close three facilities for one or two weeks at a time and decrease the length of the workweek at two plants, a company spokeswoman said Friday.

In addition, TI is contending with its decreasing favor on Wall Street. Where it was a portfolio manager's darling during the fall, it has now made its way onto some investment banks' "hold" lists. On Friday Lehman Brothers analyst Dan Niles lowered his earnings and revenue estimates for the company, noting that TI's 39 times 2001 earnings multiple seems high given that both the wireless and personal computer end markets are suffering. Cell phone growth that was 40% last year may be only 10% this year (even worse than Motorola indicates).

And, Niles wrote, underutilized plants -- such as the production cutbacks -- can cut down on profit margins. TI also sells semiconductors to Sun, which on Thursday warned that it wouldn't meet earnings expectations. (Lehman hasn't done any underwriting for Texas Instruments. It rates the stock market-perform.)

Perhaps Bob Growney, Motorola's president and chief operating officer, described it best during the company's conference call Monday. Semiconductors, he said, are in "free-fall mode." Their stocks certainly are.