Rough Start for Chip Stocks

An analyst downgrade hits the sector.
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SAN FRANCISCO -- Semiconductor stocks began the new year with a dud, thanks to a slew of downgrades from a Wall Street analyst.

Bank of America's Sumit Dhanda released bearish notes some of the chip sector's biggest names Wednesday, including

Intel

(INTC) - Get Report

,

Advanced Micro Devices

(AMD) - Get Report

and

Texas Instruments

(TXN) - Get Report

.

The downgrades dragged down the entire semi sector, with the Philadelphia Stock Exchange Semiconductor Sector Index slipping 3% to 395 -- its lowest level in 16 months.

The news follows weak monthly sales data from the Semiconductor Industry Association on Monday, in which

global chip sales posted the lowest sales growth in at least five years.

Cramer: Ignore the Semi Downgrades

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The seasonally slow first half of 2008, and indications of a modest inventory build of PC motherboards, will limit near term upside for Intel, wrote Dhanda, even though the chipmaker's competitive positioning "has never looked better."

Dhanda downgraded Intel from a buy to a neutral rating, as he did with Texas Instruments,

Analog Devices

(ADI) - Get Report

,

Semtech

(SMTC) - Get Report

and

Power Integrations

(POWI) - Get Report

.

AMD,

LSI

(LSI) - Get Report

and

National Semiconductor

(NSM)

were all downgraded from neutral to sell ratings.

Shares of Intel dropped 5.7%, or $1.52, to $25.14 in midday trading, while Texas Instruments fell 4%, or $1.37, to $32.03.

AMD and LSI

-- two of the chip sector's biggest losers in 2007 -- set fresh 52-week lows Wednesday. AMD sank 5.8% to $7.07, while LSI was down 7.3% to $4.92.

Dhanda wrote that despite AMD's steep selloff in 2007, it's still too early to call a bottom on the stock. The company will face even more challenging times in 2008, he said, due to market-share loss, cost structure pressures and optimistic profit margins.

Dhanda now expects AMD to lose $1.26 a share in 2008, instead of his previous estimate of a loss of 76 cents, and puts a $5 price target on the stock.