Is the Chip Industry in Trouble After All?

There are conflicting reports of the semiconductor sector's health. Who do you believe?

Chip maker Altera (Nasdaq: ALTR  ) just announced fourth-quarter results, beating analyst estimates on both the top and bottom lines. But shares are down a couple of percentage points anyway, because management also published a gloomy outlook for the next quarter.

CEO John Daane made it out to be an industrywide slowdown. "We continue to believe that these factors, plus ongoing FPGA share gains, give us the potential over time for sales growth twice that of the semiconductor industry," he said. Translated into plain English, he's saying that Altera will do much better than your average chip designer, but sales are still going down. If a supposed leader sinks, then the sector must be in deep trouble.

Contrast that view with the signals coming out of industry giants Intel (Nasdaq: INTC  ) and Texas Instruments (NYSE: TXN  ) . Despite reports of the PC market's death, Intel posted record sales and indicated more good news in the next quarter. Then TI followed up with another terrific report, explicitly saying that "the bottom has formed" in this market cycle.

And if you think that these reports are inappropriate as guideposts for Altera's specialized programmable chips, consider direct competitor Xilinx (Nasdaq: XLNX  ) . Its third quarter was nothing special, but shares still skyrocketed on this week's report because Xilinx expects market-beating growth in the fourth quarter.

So we have one company expecting headwinds, while peers and sector neighbors put up their sails to enjoy gusts pushing them forward instead. Management wants you to believe that the industry is holding Altera back, but there's little evidence for that opinion. Rather, it looks like Altera doesn't want to admit to losing market share.

The wireless industry is the main driver of Altera's business, but should your portfolio really rely on a company that's losing market share while management says that everything is just fine? Fool analysts can point you to at least 3 other chip stocks that also appear primed to thrive from this same trend. Click here to access The Fool's free report detailing its best ideas of how to play the mobile boom.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Motley Fool owns shares of Intel and Texas Instruments. Motley Fool newsletter services have recommended buying shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.


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  • Report this Comment On January 25, 2012, at 12:51 PM, winklerf wrote:

    FPGAs are most useful for low volume products and quickly changing products. This market not having a good outlook could just mean that their market is being taken up by small microprocessors and software solutions, which wouldn't be all that surprising. Programming an FPGA is harder even than writing code in an Assembly language. With microprocessors and boards becoming so cheap and being so powerful, they might just being pulling business away from FPGAs. Needless to say, a deeper analysis and understanding of electronics is necessary if you want to read these tea leaves to understand what is going on in the electronics market.

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