Chip stocks are starting the new year with plenty of bruises.
Fears of an imminent economic recession, along with the current oversupply of memory chips, have beaten down semiconductor stocks.
The Philadelphia Stock Exchange Semiconductor Sector Index is down roughly 18% in the last three months compared with the Nasdaq's 2% decline.
Yet even in this grim environment, there are some stocks that stand out for their sheer underperformance -- stocks that have imploded so thoroughly and spectacularly that their hapless owners no doubt guzzled champagne for reasons other than merrymaking at year's end.
And the chip sector provided a fair amount of these train wrecks in 2007, vaporizing billions of dollars in shareholder value.
As a new year gets under way, it's worth looking back at some of the biggest chip losers of the past 12 months -- examining which might have hit bottom and are poised to bounce back and which have the air of perennial basket cases.
: With its stock down a stunning 74% in 2007, closing the year at $3.93, the flash-memory chipmaker is among the chip sector's biggest flame-outs. To be fair, the company plays in the rough-and-tumble memory sector, where the pain has been widespread:
is down 49% and
is down 60% since the start of the year.
But the decline of Spansion's stock, which trades below book value, is particularly striking given that the company's shares have been publicly listed for only two years.
Spansion is living life in the flash memory market's slow lane, making the NOR chips used to store a cell phone's software code, rather than the hot-selling NAND flash chips that store MP3 songs and the like.
The company has not turned a profit in the past five years, has repeatedly missed Wall Street expectations and is carrying a significant amount of debt in a market that shuns highly leveraged balance sheets.
"No one's going to give them any benefit of the doubt right now," says Lazard Capital Markets analyst Daniel Amir, who rates Spansion neutral and whose firm makes a market in Spansion shares.
The burden is on Spansion to impress the Street, says Amir, and that means turning a profit.
"If it happens in '08, clearly Spansion's a steal at these levels," Amir says.
There are a few reasons to be optimistic. Spansion recently opened a 300mm chip manufacturing facility, which should lower its costs. And the
forthcoming joint venture between
brings further consolidation to the NOR market, offering hope for a rebound in NOR chip prices, which have been depressed.
Still, the company's track record on the bottom line doesn't inspire confidence, and the Street isn't expecting Spansion to turn a profit until 2009, with the average analyst expectation for 2008 calling for Spansion to lose 97 cents a share.
Advanced Micro Devices
: What hasn't been written about AMD's problems and its spectacular fall from grace?
Not long ago, AMD could do no wrong. Today, the Sunnyvale, Calif., chipmaker looks like a case study in self-destruction.
The Street has mercilessly pushed AMD's shares down roughly 63% in the past 12 months, leaving the stock, which finished 2007 at $7.50, at its lowest level since 2003.
Like Spansion, AMD's long-term debt ($5.2 billion) is a red flag for investors, who fret that the company will be financially hamstrung and unable to raise more cash in today's tight credit market. Also similar to Spansion (which was born as a joint venture between AMD and
), AMD is on a quest to get back in the black, after losing $1.6 billion in the first three quarters of 2007.
It won't be easy. While rival Intel has released a
slew of new quad-core microprocessors, AMD's long-awaited quad-core chips sport disappointingly low clock speeds and are
plagued with a technical bug that has prompted AMD to delay the product's general availability.
With no slam-dunk product in the offing to turn things around in 2008, it's hard to imagine AMD reclaiming the momentum it enjoyed a few years ago.
The few potential near-term catalysts for the stock involve changes to AMD's manufacturing strategy or its management team -- neither of which guarantees an end to AMD's challenges.
: If you're looking for a stock that's universally reviled, look no further than Sigmatel. All six analysts who cover the small-cap chipmaker rate it a hold, underperform or sell.
They may be on to something. Sigmatel, a company that makes multimedia processors, began its restructuring in January with a new chief executive, a new focus on three markets -- portable media players, television audio and printers --- and layoffs (the company's has cut its headcount by one third over the past year). The chipmaker promised to deliver the first taste of the turnaround by the end of the year, but the company's fourth-quarter guidance fell short of Wall Street expectations.
Meanwhile, the stock has plunged 53% in the last 12 months, trading at $2.11 at year-end and seemingly oblivious to management's turnaround talk.
In fact, Sigmatel's efforts to overhaul its business are nothing new. In the summer of 2006, the company sought a fresh start by selling its audio PC business for $80 million.
And the stock's decline is also par for the course. Sigmatel's shares plunged 67% in 2006 and 61% in 2005. At that rate, it's a wonder there's still any downside left.
As a side note, the small-cap semiconductor scrap heap has two other noteworthy names:
, whose stocks fell 60% and 64%, respectively in 2007.
: LSI began the year with high hopes, closing its $4 billion merger with Agere Systems. But the marriage has brought only heartache for LSI investors, who have watched the stock fall 41% in the last 12 months to close the year at $5.31.
Trouble appeared almost immediately, when the combined revenue of the two chipmakers in the second quarter of 2007 proved significantly less than what LSI and Agere had generated as independent companies in the year-ago period.
"LSI thought they were buying a certain amount of revenue, and it turned out to be lower," says Friedman Billings Ramsey analyst Craig Berger.
A wave of consolidation among customers in the networking industry, such as
, has put further pressure on LSI sales.
Even after the stock's drop, LSI shares still trade at 15 times forward earnings. That's not a screaming bargain in a market in which some chip firms have much lower multiples.
For the stock to see any upside, Berger reckons LSI needs to bolster its top-line growth or make deeper cuts to operating expenses -- or both.
That gives the chipmaker some fodder for potential New Year's resolutions. The question will be whether it lives up to them.