Chip stocks tumble on BofA Merrill downgrades

BofA Merrill Lynch turned bearish on the industry and downgraded several chipmakers, including Intel Corp., what led to the sharp falling of semiconductor stocks. Shares of Intel fell 6 percent to $19.01. Rival AMD dropped 5 percent to $6.96.
As for other chipmakers the situation is looking the following way: Nvidia dropped 5 percent to $12.87; Micron (MU.N) was down 7 percent at $6.97; and RF Micro (RFMD.O) was down 5 percent at $4.42. The Philadelphia Semiconductor Index (.SOXX) was down 4 percent at 309.37.
The drop of semiconductor chips dragged the broader U.S. markets - the Nasdaq Composite Index (.IXIC) fell 1.86 percent, the Dow Jones industrial average (.DJI) slid 1.27 percent and the Standard & Poor's 500 Index (.SPX) tumbled 1.55 percent.
Since the start of the year chip stocks have been moving only up. Intel has risen 37 percent this year not taking into account today's losses. AMD has risen 239 percent.
The brokerage said a correction was likely, given the rising levels of inventory in the supply chain. The brokerage made the rating changes of Intel, the world's largest chipmaker, to "neutral" from "buy," and both to its rivals LSI Corp, Marvell Technology Group Ltd, Texas Instruments Inc and Dutch chip equipment maker ASML Holding NV.
"While we believe the correction will likely prove short and shallow, we think any hint of a correction in the supply chain could punish (semiconductor) stocks," said a note to clients written by BofA Merrill.
BofA Merrill also declined its estimate of 2010 growth for the sector in 2010 to 18 percent from 21 percent.
Microchip Technology Inc, Maxim Integrated Products Inc, National Semiconductor Corp, Power Integrations Inc and British microchip designer ARM Holdings Plc were also downgraded and “bid” each to "underperform”.
"Barring a sharp upturn in the global economy, our indicators point to the potential for an inventory correction, thus rendering the risk-reward associated with ownership of chip stocks unattractive," it added.
The brokerage sees a downward bias to PC build forecasts in the near-term in recent indications from the Asia PC supply chain. With personal computers accounting for more than 40 percent of overall semiconductor sales, the weakness in the PC supply chain cannot be ignored, BofA Merrill said.
Despite of the cheerless forecasts regarding the sector, the continued growth in electronic end demand is expected anyway in conjunction with an economic recovery. Global semiconductor sales in the third quarter rose 19.7 percent, according to the Semiconductor Industry Association’s statement forecasted optimistic full-year sales.
According to Doug Freedman, analyst at Broadpoint Amtech, there is still a lot of uncertainty in the market. "At a period of time when there isn't really a lot of information out there, everyone is trying to figure out, is demand going to be good enough, or will they overshoot on inventory?"