Goldman Sachs cut the stock to "market outperformer" from "recommended." Shares of the chipmaker were off more than 12 percent, or $7.88, to $56.50 in early trading.
The company makes high-bandwidth integrated circuits used to control the flow of voice and data transmission across fiber-optic networks.
After markets closed Monday, the San Diego-based company reaffirmed its outlook for its March and June quarters, noting that bookings remained "robust" in its fiscal fourth quarter, which ends March 31. However, the company added that it had seen some cancellations in the past week.
"If these cancellations are merely a blip and not a trend at (Applied Micro), we expect to meet or beat expectations," CEO Dave Rickey said in the release. "However, given concerns that abound in our end markets, we are on alert."
Analysts raised warning flags on Applied Micro's short-term outlook but remained positive in the long term. Goldman Sachs analyst Nathaniel Cohen said that while Applied Micro remained a core holding within the sector, changes in business momentum would likely cause some near-term pressure on the stock.
One key concern for Cohen was the slowdown in booking in the company's newer product lines, which had been growing at a rapid clip. The analyst also said the shares were still at a lofty valuation compared with competitors TransSwitch and Vitesse and that it was increasingly unlikely that Applied Micro's earnings multiples could sustain such pricing, given current uncertainties.
Merrill Lynch analyst Mark J. Lipacis reiterated his "market perform" rating for the company. Lipacis said that the order cancellations were at more than one or two customers but that they were neither broad based nor across the-board.
In a research note, Lipacis said he expected the news to have an effect across the communications-chip sector, as Applied Micro is the second marquee company to admit to changes in order patterns, on the heels of PMC-Sierra's recent warning.
Analyst Charlie Glavin at Credit Suisse First Boston adopted a "wait and see" approach, while maintaining a "strong buy" on Applied Micro's stock.
"We would not be aggressive buyers on any semiconductor name until the Cisco release tonight," Glavin wrote in his research note Tuesday.