Chip-Stock Downgrade Slams the Sector

Xilinx Inc. and Altera Corp. led the tech sector’s latest plunge Tuesday after analysts cut their ratings on the stocks--warning that the specialty computer chip makers’ profits may be hurt because chip supplies are increasing relative to demand.

Xilinx (ticker symbol: XLNX), the world’s biggest maker of programmable logic chips, fell $16.69, or 21%, to $62.44. No. 2 Altera (ALTR) declined $11.06, or 27%, to $29.81.

The sell-off spread to other chip makers, and the SOX semiconductor index slid 10%.

“Revenue growth rates for the next two quarters are likely to slow noticeably” as the chips become more available and as customers balance inventory levels, Lehman Bros. analyst Dan Niles wrote in a report to clients. He downgraded both companies to “neutral” from “outperform.”

The chip makers, both based in San Jose, were reduced to “outperform” from “buy” by Salomon Smith Barney analyst Clark Westmont. Prudential Securities analyst Hans Mosesmann cut Altera to “accumulate” from “strong buy.”

Xilinx and Altera together control about 70% of the market for high-end programmable logic chips, which can be reprogrammed with software to add features or improve performance.

Altera and Xilinx have seen demand for their products outstrip supply in the last year as they benefited from growth in the communications industry, where the chips are used in phone switches.

But now supplies are rising, analysts say. Customers, said Westmont, are “increasingly aware of the loosening supply situation in the chip industry and will become less aggressive in their order rates in the next few months.”

Xilinx’s customers include Lucent Technologies (LU), the No. 1 maker of phone equipment, and Cisco Systems (CSCO), the biggest Internet-equipment maker. The chips can cost thousands of dollars each.

In the wake of the downgrades, Xilinx and Altera both repeated earlier statements that they should report 15% growth in sales for the quarter ended in September.

But “the September quarter is not what investors are worried about,” said Banc of America Securities analyst Richard Whittington. Rather, Wall Street is looking ahead to the next few quarters.

Arrow Electronics Inc. (ARW), the world’s biggest distributor of electronic components and computer products, and No. 2 Avnet Inc. (AVT), said chips from Xilinx and Altera remain in tight supply and demand hasn’t slackened.

Before Tuesday’s decline, Xilinx shares had risen 74% this year. Altera shares had risen 65%.

Altera will report third-quarter earnings Monday after markets close, and Xilinx will release fiscal second-quarter earnings Tuesday.

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Selling Out of Silicon

Shares of computer chip makers Xilinx (ticker symbol: XLNX) and Altera (ALTR) were hammered on Tuesday after at least two brokerages downgraded them.

Source: Bloomberg News