A couple of communications chip stocks suffered double-digit losses a day after leading name
posted disappointing earnings and announced layoffs. In another blow to the sector, Goldman Sachs downgraded a handful of the stocks Friday morning, while admitting that the move came too late.
Downgraded stocks included Vitesse,
Applied Micro Circuits
At Friday's trading close, Vitesse had lost 60 cents, trading down 18.9% to $2.58; Applied Micro Circuits lost a penny, or 0.2%, to close at $4.84; and Conexant gave up 39 cents, losing 15.2% to $2.18.
PMC-Sierra, which posted a narrow-than-expected loss Thursday, was the sole exception: Friday it gained 60 cents, trading up 6.1% to $10.40.
In a research note, Goldman analyst Nathaniel Cohn issued a mea culpa, acknowledging that "we have clearly been wrong to maintain more optimistic ratings during this challenging market environment." He issued the downgrades on the basis of the communication chip companies' high valuations and still-unclear paths to profitability.
Nevertheless, he added: "Once we move through the seasonally slower summer months, we could see a nice rally driven by incrementally more constructive data points as Q4 is the seasonally strongest quarter of the year for most end markets."
Among his specific near-term concerns for stocks: In light of the uncertain revenue outlook at Vitesse, he thinks operating expenses at the company remain too high, even after yesterday's announcement that it will cut 17% of its workforce. On Thursday the company posted a huge net loss in earnings for the third quarter of its fiscal year 2002.
Despite "solid" business trends at PMCS, the telecom end markets remain weak, said Cohn. The company just missed sales numbers when it reported earnings, though its loss was less steep than expected.
AMCC suffers from higher exposure than its peers in the optical transport segment, and Cohn believes it "will need to restructure to get to profitability over the next year, which could temporarily accelerate the burn rate and reduce the cushion for downside."
Finally, Cohn said Conexant will need to "further adjust its operating structure" and make better progress on cost-cutting.
Investors in the sector will be watching Monday, when
reports. Conexant releases its financial results next Wednesday.