Shareholders in communications chipmaker Conexant Systems (NASDAQ:CNXT) are either on the phones to their brokers today, or their therapists, after the stock dropped nearly 50% this morning (OK, 42%). The cause: a revenue and profit warning that bears the distinct aroma of fear.

For those of you unfamiliar with the firm, it manufactures chipsets and products for home networking, broadband modems, TV set-top use, and its flagship dial-up modem products. This is a crowded field, with competition from the likes of Agere Systems (NYSE:AGR.a), Broadcom (NASDAQ:BRCM), Marvell Technology (NASDAQ:MRVL), PMC-Sierra (NASDAQ:PMCS), and others.

According to today's press release, it's some unnamed Taiwanese others that are causing the troubles for Conexant, snatching market share from its wireless LAN biz with lower-priced products. Where the company had predicted third-quarter revenues near $316 million and earnings around $0.04 per share -- before charges -- it now looks for sales close to $270 million and earnings at $0.02 per share.

Bargain hunters may like the current $2.40 share price, which is close to reported book value. But skeptics might direct their attention to the fact that the firm appears unable to respond to tough competition, while it carries five times as much debt as cash. Personally, I can't get over the firm's sketchy history, with earnings and free cash flow only once in the past half decade, back in 1999.

Though analysts have been predicting a healthy turnaround over the next couple of years, Fools would be wise to stay very wary of a firm whose prime revenue source can be so easily gobbled by competitors.

If you're attracted to small caps, you would probably enjoy looking at a few that can boast earnings, free cash flow, and hardy business models -- just the kinds of things Tom Gardner looks for in Hidden Gems .

Fool contributor Seth Jayson has no position in any company mentioned. View his Fool profile here.