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Tech Industry

Chip stocks ride above market turmoil

While many tech stocks are declining, shares in chipmakers have posted healthy gains.

While many tech stocks posted sharp declines in recent weeks, shares in chipmakers have been a safe, and profitable, haven.

Today, for example, Quantum Effect Devices became the latest chipmaker to sell its shares to the public, and demand quickly pushed the shares up 145 percent at the opening bell.

Also today, GlobeSpan said it will split its stock 3 for 1; shares in the maker of chips used for Net access have surged more than eight-fold since GlobeSpan's June IPO.

GlobeSpan's rise and Quantum's successful public offering are evidence of investors' appetite for chip stocks, which just a year ago was struggling to overcome the Asian economic flu.

Last month, the Philadelphia Semiconductor Index hit a new 52-week high and posted a 9 percent gain, while the Nasdaq and Dow Jones Industrial Average fell roughly 4 percent in the period.

"This is one of the strongest upturns we have seen in a while," said Peter Wolff, an analyst with ING Barings. "And, this time, there are more issues driving it than PCs. Telecom and networking are playing a larger role; we have a new operating system with Windows 2000 and the corporate market is looking to upgrade."

Optimism in the chip market is being fueled by a number of factors. Following a three-year trough in which several companies lost money, the semiconductor industry entered a cyclical upturn in 1999 that is expected to crest in 2002. Chip sales came to more than $144 billion in 1999, according to estimates from the Semiconductor Industry Association. Sales are expected to increase by 20 percent over the next two years, reaching $234 billion.

Like every other Net, e-commerce fueling chip surgesector in computing, the rise in demand is being fueled by the Internet. Companies that specialize in processors for networking and communications chips, for instance, are seeing sales jump because of increased sales of routers and other equipment that incorporate these chips.

Rising sales of cell phones have also added to the frenzy. Sales of Digital Signal Processors (DSPs) and Flash Memory chips, two of the key components in cell phones and relay stations, have grown substantially. One of the key beneficiaries of this trend has been Texas Instruments, which banked on DSPs in the middle of the decade.

Many of the new start-ups and established mid-sized companies are being bought by larger companies. Intel, for instance, completed eight acquisitions last year, with most of the deals coming in the networking sector. Additionally, the sector's run-up has fueled the IPO pipeline for the group. Although called chipmakers, most of the newer companies focus on designing processors and leave the actual manufacturing to others.

Silicon Laboratories and inSilicon filed their respective IPO plans with the Securities and Exchange Commission several weeks ago, further evidence that chipmakers are making a run on the public market. Last Friday, ST Assembly Test Services debuted its successful IPO, which soared 92 percent on its first day of trading after pricing the shares at $21.

"Last year at this time, we didn't do four chip deals until the end of June," Thomson Financial Securities Data analyst Richard Peterson said.

For the entire year, there were 12 chip IPOs, which raised $1.2 billion. "It's not unreasonable to believe we'll do more than 20 deals this year if the stars are aligned correctly," said Peterson.

If that forecast holds true, 2000 would rival the performance of 1995, the last blockbuster year, Peterson said.

Quantum, which makes microprocessors for both networking equipment and Internet devices, marks the second chip IPO this year. Earlier, the company raised its IPO range to $13 to $15 a share from its initial range of $10 to $12, due to investor demand. The company trades under the ticker "QEDI."

ST Assembly, which provides test and assembly services for chipmakers, faced similar demand as it kicked off the chip IPOs for the year. The company raised its range prior to debuting to $18 to $20 a share from $12 to $14. ST Assembly's shares eventually priced at $21.

"Semiconductors is one of the hottest markets around, based on the Philadelphia Index," said Jeff Hirschkorn, a senior analyst with IPO.com. He added that computer makers like Dell and Gateway have found chips in short supply, which bodes well for semiconductor companies.

But some analysts caution that investors should carefully evaluate each deal.

"Companies like Intel and Broadcom have their hands in every pie, so the opportunity for pure plays is becoming increasingly narrow and long-term sustainability is questionable," said Ashok Kumar, an analyst with US Bancorp Piper Jaffray.

Broadcom, which went public in 1998, has initiated two 2-for-1 stock splits, with the latest to take effect Feb. 14.

News.com's Michael Kanellos contributed to this report.