Bad is Good as Applied Micro Climbs on Weaker Revenue Estimate

Updated from 2:57 p.m. ET

When is bad news good? When it could've been worse, or at least that's the way it looked in the semiconductor sector Thursday.

Applied Micro Circuits' (AMCC Quote - Cramer on AMCC - Stock Picks) CEO talked down the company's revenue estimates for this quarter Thursday, but its stock finished regular trading up 11%, even though it initially fell after his comments on CNBC.

The belief among investors was that it could've been worse. The low end of Applied Micro's new revenue estimate range, $125 million to $135 million, is just 13% lower than the previous quarter's $143.3 million. And that's better than the weak outlook from some other chipmakers.

Meanwhile, Broadcom (BRCM Quote - Cramer on BRCM - Stock Picks), one of the latest recipients of bad news in the sector, rallied to finish regular trading off just 2.5% after being off 11%. Its stock was initially hit after word came Wednesday that computer networking company 3Com (COMS Quote - Cramer on COMS - Stock Picks) expected lower-than-anticipated revenue for the quarter ending March 2. 3Com is a big Broadcom customer.

Broadcom also was downgraded by at least two Wall Street investment banks -- Salomon Smith Barney and Merrill Lynch. (Merrill has done underwriting for Broadcom, but Salomon hasn't.)

Chip companies have been suffering for about six months from an inventory overhang that worsened as the macroeconomic climate deteriorated and demand slowed. Companies that make chips for cell phones were hit first, then the microprocessor makers started to suffer as consumers stopped buying as many personal computers. Then, as talk began circulating that telecommunications spending was tightening, the communications chip stocks started to back off.

But all this news is coming at a time when investors in Applied Micro, Broadcom and other communications chip stocks have already heard similar stories of softening revenue and weakening market conditions from 3Com competitors like Nortel (NT Quote - Cramer on NT - Stock Picks) and Cisco (CSCO Quote - Cramer on CSCO - Stock Picks). Therefore, the effects of the news on the stocks were muted compared to previous washouts.

For instance, last week Nortel gave a downbeat projection for 2001 growth that drove Applied Micro and other chip stocks -- from Intel (INTC Quote - Cramer on INTC - Stock Picks) to PMC-Sierra (PMCS Quote - Cramer on PMCS - Stock Picks) -- substantially lower.

But even after the Applied Micro news Thursday, the other communications chipmakers' stocks were up as attention in the sector swung to bad news among the chip equipment makers, which are experiencing order shortfalls as the chipmakers cut back on expansion.

That said, the 3Com news does reveal a real potential problem for Broadcom. Salomon, which cut Broadcom to an outperform from a buy rating, noted that 3Com made up 22% of Broadcom's sales in the month of December. And Solly noted that 54% of its December sales came from 3Com, Cisco and Motorola (MOT Quote - Cramer on MOT - Stock Picks), which last week held an extremely downcast conference call on the cellular phone business.

So there's still a chance investors eventually will begin to see bad news for what it actually is.