AOL-Time Warner Deal Puts Investors in the Chips

The merger affirms the solid prospects for Net-related companies, especially chipmakers.
Author:
Publish date:

SAN FRANCISCO -- Semiconductor investors were dying for the starting gun. After last week's declines belied the strength of new orders hitting chipmakers, they were looking for an excuse to buy -- any excuse.

They settled for a merger between an Internet company and a media company. And so news that

America Online

(AOL)

is merging with

Time Warner

(TWX)

sent the

Philadelphia Semiconductor Index

up 7.4% to a new high of 741.69.

The association wasn't entirely frivolous. Cable-modem chipmaker

Broadcom

rose 11% to 295 9/16 after hitting a record high of 304 7/8. The merger, says

Salomon Smith Barney

chip analyst Clark Westmont, is a strong signal that the future of the Internet will be in cable, a chip market that Broadcom dominates. "All paths through cable pass through Broadcom," Westmont says. (Salomon isn't an underwriter of Broadcom.)

Trent Nevills, portfolio manager at

Federated Investors

, which holds Broadcom in its

(FCTAX)

Communications Technology,

(FGSAX) - Get Report

Growth Strategies and

(FLGAX)

Large Cap Growth funds, says Broadcom was the first chipmaker in the markets for cable modems, digital subscriber lines and high-definition televisions.

Broadcom is holding its dominant share in these markets, even as competitors like

Conexant

(CNXT) - Get Report

and

Intel

(INTC) - Get Report

emerge. Nevills says that as fast communications networking makes its way into consumers' homes, Broadcom will dominate that market. "They will own the last mile," he says.

The gains, which spread through most of the chip sector, were strongest in communications-chip makers.

Applied Micro Circuits

(AMCC)

rose 21% to 145 1/2 after reaching a record high of 150 1/4. Investors saw the proposed AOL-Time Warner merger as a sign of a healthy future for Internet technology in general. "The Internet isn't made out of thin air, it's made out of infrastructure," says

Roberston Stephens

analyst Arun Veerappan. The chipmakers "are viewed as a safe bet on the Internet." (Robbie Stephens isn't an underwriter of Applied Micro.)

Investors were also buying Applied Micro shares in anticipation of fourth-quarter results from both the company and its chief competitor,

Vitesse

(VTSS)

, both of which announced results Monday afternoon. After the market closed, Applied Micro reported earnings of 21 cents a share in the December quarter, 2 cents above the

First Call/Thompson Financial

consensus. Vitesse reported earnings of 14 cents a share in the December quarter, in line with the First Call estimate.

Also strong Monday were the chip-equipment makers. If chips are seen as a safe bet on the Internet, chip-making equipment is seen as a safe bet on chips. Shares of just about every equipment maker soared Monday, after a positive preannouncement from

Silicon Valley Group

(SVGI)

. The company estimated its earnings for the quarter ended Dec. 31 at 15 cents a share, 9 cents higher than the First Call consensus.

It was the fourth positive preannouncement for the sector for this quarter, and it followed announcements from

Kulicke and Soffa

(KLIC) - Get Report

on Jan. 4,

Asyst Technologies

(ASYT)

on Jan. 3 and

Novellus

(NVLS)

on Dec. 17. Shares of SVG rose 20% to 20 25/32, while Novellus was up 11% to 138 9/16.

Booming business for Silicon Valley Group is a direct result of booming business for its top customer, Intel, says one sell-side financial analyst, who asked that his name not be used because firm does not permit him to be quoted by the press. The firm is not an underwriter of SVG or Intel.

"Sentiment-wise, everybody believes every one can beat the numbers," the analyst says.