Programmable logic chips differ from standard chips in that they can be easily upgraded without having to be redesigned. They are used in wireless phones and fiber-optic networks.
Shares of Altera fell $12.63, or almost 31 percent, to $28.25. Shares of Xilinx fell $23.69, or almost 30 percent, to $55.44.
Reports by Lehman Brothers analyst Dan Niles and Salomon Smith Barney analyst Clark Westmont warned that sales of programmable logic chips are likely to slow as components become more available and as customers respond with less aggressive orders.
The reports further warned that both companies' "relatively high" exposure of 20 to 25 percent in Europe could have adverse effects. Europe has been plagued by a general market weakness and a devalued euro.
Salomon Smith Barney's Westmont wrote that Altera and Xilinx are not immune to the larger downturn in the chip market, highlighted last month when Intel warned that its third-quarter revenues would be lower than expected due to weak demand in Europe.
"Given the larger backdrop of chip market deterioration, we believe this approach (the former 'buy' rating) is increasingly becoming a game of 'chicken,' with investors hoping to swerve out of PLD (programmable logic device) stocks at the last possible minute," wrote Westmont. "We believe the risk/reward tradeoff in this timing equation no longer justifies a 'buy' rating."
Lehman Brother's Niles cut both companies to "neutral" from "outperform," lowering his price target on Xilinx to $90 from $100 and dropping Altera to $55 from $75. He pointed out, however, that he expects both companies to report better-than-expected earnings for the September quarter.
Salomon Smith Barney's Westmont downgraded both companies to "outperform" from "buy" and cut his price target on Xilinx to $100 from $110 and on Altera to $60 from $68.
Prudential Securities also downgraded Altera to "accumulate" from "strong buy," lowering its price target on the company to $45 from $72. Prudential reiterated a "strong buy" rating on Xilinx.
The top five most-covered companies this morning were: Altera (ALTR) with four broker reports, and Broadvision (BVSN), Corvis (CORV), Wind River Systems (WIND) and Xilinx (XLNX), each with two broker reports.