Is Silicon Labs the Canary in the Coal Mine?

It's the season to be sullen -- at least for shareholders of Silicon Laboratories (Nasdaq: SLAB  ) .

The maker of media and communications chips saw shares sliding as much as 14% Monday after outlining a very weak third quarter. The second quarter wasn't too bad, mind you. Sales rose 5.5% from the first quarter, well within official guidance limits, and non-GAAP earnings of $0.48 per diluted share beat the analyst consensus by a couple of pennies.

But like I said, the third quarter will be challenging even by the standards of a seasonally soft late-summer period. Sales are projected to shrink as much as 10% quarter over quarter, and mildly stronger gross margins won't be able to prop up earnings. "Near-term visibility is a concern as end customers globally are much more cautious than they were even a quarter ago," said CEO Necip Sayiner. But he still believes in hitting the full-year targets he set up back in January, so the longer-term guidance stands firm.

Silicon Labs backs up that view with a strong product pipeline and 45% more broad-based design wins year over year. That's the general microcontroller division where Silicon Labs competes with large vendors including Atmel (Nasdaq: ATML  ) , Texas Instruments (NYSE: TXN  ) , and Freescale (NYSE: FSL  ) .

Earlier this year, that segment lagged while video chips led the way toward growth. Now it's the other way around as TV customers in particular are showing a weak hand. If that's true for the entire subindustry, and not just for Silicon Labs, this could be even worse news for Trident Microsystems (Nasdaq: TRID  ) and Zoran (Nasdaq: ZRAN  ) , which don't have microcontroller divisions to fall back on.

Yet Zoran traded sideways Monday and Trident investors appear to see Silicon Labs' weakness as a chance to steal market share. We shall see. Given the tenor of electronics markets these days, I think they're setting themselves up for disappointment when the earnings reports come in. This sudden drop made Silicon Labs affordable, but you might get your chance to buy the others on the cheap soon enough.

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