"Investors are skittish, and the disappointing results from LSI are at the root of the sell-off," said Charles Boucher, a semiconductor analyst at Bear Sterns.
LSI announced earnings after yesterday's market close that sparked the wrath of some investors.
While earnings met expectations, sales did not. The company said a shortage of parts and shipment delays caused sales to miss estimates by about $20 million.
As a result, LSI shares sank $8, or almost 20 percent, to $32.50 today on a volume of 50.7 million shares, more than 12 times the stock's daily average volume.
The chipmaker reported earnings of 29 cents a share excluding extraordinary items, just meeting analysts' expectations of 29 cents as surveyed by First Call/Thomson Financial. A number of brokers responded by slashing their ratings on the stock.
Investors then punished the entire sector, as the Philadelphia semiconductor index fell 70.08, or 6 percent, to 1,034.20.
Mona Eraiba, an analyst at Gruntal, called the downturn "a classic investor reaction. When you have a disappointment in one company, it's generalized, and the whole sector goes down."
Among the other semiconductor stocks to take a beating: Rambus fell $9.50, or 11 percent, to $75.50; National Semiconductor dropped $4.25, or almost 10 percent, to $39.88; Intel slipped $1.88 to $139; and Advanced Micro Devices fell $2.75 to $76.
The semiconductor industry is notoriously cyclical, which can make investors extra anxious. "No one wants to be the last one out of the sector," said Boucher.
Yet he does not see any signs of a slowdown. "Demand is exceeding supply, and that gap is widening, not narrowing," Boucher said. "Investors are overreacting, and there's an unjustifiable amount of pessimism toward these stocks."
Gruntal's Eraiba also agreed that demand is not an issue.
Today's slide "is more of a reflection of the psychology rather than the reality of the sector," she said. "Investors have been nervous over the sector for the last few months."
But at least one analyst thinks investor concerns are justified. "We're in the first inning of a trend reversal," said Jonathan Joseph, an analyst at Salomon Smith Barney, "but that won't be apparent until six to nine months from now."
"We believe strongly that semiconductor cycles are mostly defined by excess capacity rather than by a fall-off in demand, particularly in the economic boom of the 1990s," Joseph wrote in a recent report.
In a report dated July 17, Joseph stated that "inventories (are) rising across the board in many component suppliers and component buyers, especially cellular handset systems makers."