After two years of go-go growth in the semiconductor sector as customers restocked lean inventories, the industry is expected to post more modest growth in 2011, according to a research report by Ross Seymore, a Deutsche Bank Equity Research analyst. The chip industry is more likely to see revenue growth of 5% this year compared with over 30% last year, as it faces lower average selling prices for chips and the cyclical demand for semiconductors hits a lull.

"The memory segment is likely to see the largest ASP [average selling price] drop in 2011. These dynamics also also create risk to margins across the industry following 2010's record levels," Seymore says.

Chip suppliers to the computing and industrial markets are also expected to encounter weakness when they report their fourth-quarter results, Seymore predicts. And semiconductor companies supplying telecommunications and the industrial segment are likely to face a challenging time in the first quarter. Demand for chips by the automotive industry is expected to be strong not only in the fourth quarter when those company report but also in the first quarter, notes Seymore.

Overall, semiconductor stocks are anticipated to perform in-line with the broader market this year, rather than leaping ahead by a wide margin as they did last year, says Seymore, who notes he favors companies who have already taken a hatchet to inventory levels and whose valuations do not rely on specific revenue, margins and earnings growth potential.

Seymore pointed to Intel (INTC), Marvell Technology Group (MRVL) and On Semiconductor (ONNN) as companies that have taken those measures and are ones to watch.

The industry has indeed been on a rocket ride, with the closely watched Semiconductor Industry Association noting that the first half of last year posted more than a 50% increase in year-over-year revenue to $144.6 billion.


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