ANALYST WATCH: Chip stock banter

Semiconductor stocks were a hot topic this week after Salomon Smith Barney analyst Jonathan Joseph downgraded several stocks and warned of a possible slowdown in the next six to nine months.

Joseph cut the entire semiconductor sector from an "outperform" recommendation to "neutral," including the likes of Advanced Micro Devices (NYSE: AMD), National Semiconductor (NYSE: NSM) and Silicon Storage Technology (Nasdaq: SSTI).

"Though a slowdown in the group may take six to nine months, we see ‘first mover’ evidence of a trend reversal in decelerating industry unit shipments coupled with price declines," Joseph wrote in a research note.

The fallout was predictable as all of the stocks downgrade shed between 7 percent to 12 percent of their value Wednesday. The closely watched Philadelphia semiconductor index dropped 9 percent on the news.

But on Thursday, several analysts disagreed with Joseph, saying the recent pullback was nothing more than the usual profit taking after a batch of downgrades.

They also expect the next round of earnings reports to move the stock higher in the next few months.

Banc of America Securities analyst Rick Whittington told Reuters that he expects leaders such as Intel (Nasdaq: INTC), AMD and Applied Materials (Nasdaq: AMAT) to improve on their already lofty valuations.

"I think the stocks are going to go up from here," he said. "I think it's too early to start talk of contraction, prices declining and demand faltering."

UBS Warburg's Greg Mischou said strong demand for broadband, telecommunications equipment and PCs will carry the sector for some time.

"Intel's really ramping up production right now, especially for their 0.18 micron microprocessors," he said. "I still see strong growth ahead. The capacity issue won't come into play for quite some time."

SG Cowen & Co.'s Drew Peck said prices for flash memory, which stores information for digital cameras and mobile phones, would rebound from recent declines.

Intel and AMD will both report earnings later this month and analysts are expecting solid revenue and profit growth from both.

"We remain solidly bullish on both the semiconductor and the capital equipment groups, especially after the selloff on July 5," ABN Amro analyst Nikolay Tishchenko wrote in a research note. “We expect neither (average selling price) declines nor a meaningful slowdown of semiconductor growth in 2000.”

As a result, most of the chip stock bounced back Thursday, including Intel, AMD and Applied Materials.

Clearly, most analysts believe Joseph might have jumped the gun a bit this week.

"Although we see little to support semiconductor stock prices during the next two months, we strongly believe that the sector will be hitting new highs before the end of the year,” Merrill Lynch analyst Joe Osha said in a research note. “We would treat any weakness in the sector during the next two months as an opportunity to build positions at attractive prices.”

Intel and AMD will report their second-quarter earnings on July 18 and 19, respectively.