Semiconductor stocks slide on "reality check"

Reality bites for Intel and communications chipmakers. Intel as well as Applied Micro Circuits, PMC-Sierra and Vitesse Semiconductor all slumped after Merrill Lynch analyst Joseph Osha issued a "reality check" for semiconductor companies.

"The frantic rush to 'be in front of it' (shorthand for calling a market bottom) is creating a situation in which investors have the potential to lose 40 percent between now and the real, fundamental bottom in the semiconductor business," Osha wrote in his research note, entitled "Semiconductors: Reality Check."

Intel (Nasdaq: INTC) was off $1.45 to $18.30, Applied Micro Circuits (Nasdaq: AMCC) fell $3.40 to $26.60, PMC-Sierra (Nasdaq: PMCS) dropped $2.81 to $42.00 and Vitesse Semiconductor (Nasdaq: VTSS) fell $2.28 to $32.49.

Osha reduced his intermediate-term rating on the group to "neutral" from "accumulate" Monday following a 36 percent surge in semiconductor stocks since the Philadelphia Stock Exchange Semiconductor Index (SOX) bottomed two weeks ago.

A chip recovery has been a contentious issue since Intel reported its worst quarter in years last week and analysts started quarreling about whether the company had hit a bottom. Intel said that things should improve in its second half of the year, but Osha and other analysts said the company was likely to see a continuing decline in margins.

The recent gain "has investors asking whether we're close enough to the bottom to merit buying stocks--we think not," Osha wrote in his report.

Intel stock "is expensive at nearly 50 times prospective earnings," Osha said. And though the company's bellwether status has allowed it to move with the industry in the past, those days are over. "As evidence of company-specific problems continues to accumulate, we do not think owning the stock in anticipation of a semiconductor industry upturn later this year makes sense," Osha wrote.

The analyst said his research indicates there won't be a bottom to semiconductor revenue growth until some time this summer. Inventories appear to be high among the chipmaker's clients, and demand could be especially weak from telecommunications customers, Osha noted.

Osha also reiterated his immediate-term "neutral" rating on Broadcom (Nasdaq: BRCM) and Conexant (Nasdaq: CNXT), and lowered his intermediate-term rating to "accumulate" from "buy" on chip equipment maker Ultratech Stepper (Nasdaq: UTEK), but increased his long-term outlook rating to "buy" from "accumulate."