Mobile phones: Is the party over?

Shares plummeted across the mobile phone industry Thursday amid fears the market has peaked - will Internet phones save the day?
Written by Matthew Broersma, Contributor

The mobile phone market is booming, fuelled by attractive services like SMS and the emerging wireless Internet. But the boom may not last much longer.

That at least, was the fear of many investors, who dragged the share prices of Finnish mobile phone maker Nokia down 25 percent Thursday after the company issued a profit warning. The downturn then hit manufacturers of the chips used in mobile phones, hitting companies such as Cypress Semiconductor, Analog Devices and PMC-Sierra.

Nokia's NYSE-traded shares closed Thursday at 41 on the big board, off 13-15/16 or 25.37 percent, after warning that profits in the third quarter would be lower than in its blowout second quarter, for which it posted a 62 percent jump in pre-tax profits.

Telecom chip makers followed suit. In percentage terms, Cypress Semiconductor took the worst hit, losing 18.43 percent, or 8-1/16, at 35-11/16. Analog Devices was off 9.93 percent, or 7, at 63-1/2.

The biggest net losers included PMC-Sierra, off 16-3/8 at 180-3/16, Broadcom, off 17-15/16 at 220-1/2, and Applied Micro Circuits, off 16-11/16 at 146-3/16.

Nokia shares recovered some ground early Friday. At 9.13am GMT the shares were up 6.2 percent at 47.80 euros, helping to boost the HEX general index by four percent. Shares in rival Ericsson of Sweden, which lost 5.5 percent on Thursday, were up 1.1 percent at 174 Swedish crowns.

Despite the gains, however, Nokia is still trading at three-month lows, and has seen its gains for the year slashed to 6.2 percent.

So is the party over for the mobile phone market? Not by a long shot, say industry observers, who blame the market tumble on investor jitters and short-term manufacturing issues.

"It's primarily because of [Nokia's profit warning], and also the noise in the market in the last two or three weeks that the semiconductor cycle is close to peaking or has already peaked," said Sudeep Balain, senior technology analyst for Chase H&Q. "The cycle has not peaked. There are at least a few good years ahead of us. Handset demand is very robust."

Balain called the sell-off of the chip stocks and Nokia "totally unwarranted". "I'm looking at all of this as buying opportunity, and that's what we're telling investors," he said.

While analysts acknowledged that Nokia's profit outlook is clouded, they looked to high-end phones with Internet functionality to improve sales. "Just like in the PC world, you need upgrades that drive new product cycles," said Banc of America Montgomery analyst Alex Gauna, who predicted that chip manufacturers, who enable new technology, will benefit.

"They're just getting started. Right now only ten percent of Nokias are Internet enabled, but they're going toward virtually 100 percent," Gauna said.

Other companies have benefited from the mobile boom recently. German industrial group Siemens and its chips unit Infineon said on Wednesday they expected higher full year earnings after booming demand for mobile phones sent third quarter results soaring.

Higher chip prices sharply boosted Infineon's profits, but Siemens said a worldwide shortage of components meant it would not meet a self-imposed target of selling 30 million handsets for the year.

Siemens posted a 134 percent rise in net profit for the third quarter to June to 832m euros (about £516m).

Reuters contributed to this report.

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