Bets on chip stocks are never easy to place. Like producers of any commodity, semiconductor companies face a volatile and high-pressure pricing environment. Complicating matters, a chip firm’s market position can be easily threatened by upstart competitors with better technology.

The flip side to this is that the Philadelphia Semiconductor Index is at 467–down 11% since the end of 2001–and a long way from its two-year high of 1281. So now might be the time to think about taking a chip shot or two. As for where to look for candidates, consider microchip companies with significant exposure to the cellular phone market.

Why chips for phones? In a word: demand. Next generation wireless services, known as 2.5G and 3G, are either already in place in the U.S. or set to roll out in the next year or two. For better or worse, the handsets for these services will let users perform more complicated tasks, such as transmitting video and Web browsing. Accordingly, they will require more memory and more chips to provide the computing power.

“The growth in 2.5G and 3G cell phone business will be a driver for many chip companies,” says Manoj Nadkarni, founder and principal analyst for Chipinvestor.com, an online newsletter devoted to the semiconductor business. As with all investing in microchip stocks, Nadkarni advises investors to stay mindful of each company’s specific expertise, as well as its market share within that particular segment.

Texas Instruments’ expertise is in digital signal processors (DSP). These microprocessors allow people to have conversations over digital networks by converting analog signals, like the human voice, to digital ones and vice versa.

According to Forward Concepts, a Tempe, Ariz.-based market research firm, Texas Instruments held 43.5% of the DSP market in 2001. That share slipped somewhat from 2000, yet still handily outdistanced Lucent Technologies’ former subsidiary Agere Systems, the nearest competitor, which had 16% of the market last year.

Judging by its copious research and development spending, Texas Instruments seems determined to hang onto its share of the DSP business. Last year, the company shelled out $1.6 billion for research and development, down from 2000 but well above 1999 levels.

Full story at Forbes.com

NEW YORK – It’s been a bad year so far for many technology stocks. On a relative basis, information technology stocks in the S&P 500 have lagged behind the performance of the broader index by 10% in 2002, while the exchange traded fund tracking the Nasdaq 100 index has lost 17% of its value since early January.

Despite these declines, many technology bellwethers are anything but undervalued. Cisco Systems and Intel carry estimated 2002 price-to-earnings (P/E) ratios of 48 and 43, respectively. In contrast, the S&P 500 sells for 30 times estimated 2002 profits.

Using the latter multiple as a benchmark, we looked for cheaper technology investments. Autodesk (nasdaq: ADSK – news – people ), for example, has an estimated 2002 P/E of 17. The San Rafael, Calif.-based firm’s AutoCAD software is popular with animators, mapmakers, and architectural and mechanical designers.

Down 18% from a 52-week high of $47, Autodesk shares look undervalued by several measures beyond estimated earnings multiples. The stock sells for 11 times cash flow (in the sense of net income plus depreciation and amortization) versus a five-year average price-to-cash-flow multiple of 13.

Full story at Forbes.com

NEW YORK – The proposed $25 billion purchase of Compaq Computer by Hewlett-Packard sends a strong signal that the long-awaited consolidation in the technology sector may have begun. Massive losses and depressed share prices could lead to several mergers among hardware, chip companies and telecom equipment manufacturers in the months ahead.

Computer-company mergers do not always have successful outcomes, but in an industry that is reeling from overcapacity and a sharp drop-off in demand, there may be little choice but to seek new efficiencies and economies of scale.

One such example is Advanced Micro Devices (nyse: AMD – news – people ), a microprocessor manufacturer that has been gaining market share at Intel’s (nyse: INTC – news – people )expense. AMD has an enterprise value of $4.5 billion. Calculation: market value plus total debt and the liquidation value of preferred stocks minus cash and equivalents. The enterprise value represents the minimum price an acquiring firm must pay to buy another publicly traded company.

Dividing AMD’s enterprise value by its latest 12-month operating income (earnings before interest, taxes, depreciation and amortization) produces an enterprise multiple of 3.5. By contrast, Compaq (nyse: CPQ – news – people ) has an enterprise multiple of 6.

Full story at Forbes.com

NEW YORK – Network and computer security companies have gotten punished along with the rest of the technology sector. But while valuations may have fallen off, worries about electronic security haven’t, particularly regarding wireless technologies.

“Wireless security continues to be a chief concern of both enterprise customers and users in general,” says Francesca Mabarak, senior analyst for mobile technologies at the Yankee Group, a Boston-based technology research firm.

The idea of clever hackers tapping into wireless signals has stirred anxieties. The ongoing convergence of cellular phones and handheld computers creates new concerns. “When people start losing wireless devices with important information on them,” Mabarak says, “there’s a major problem if those devices fall into the wrong hands.”

One company offering security solutions for wireless users is RSA Security (nasdaq: RSAS – news – people ). The firm’s encryption technologies, which secure data in transit by altering it according to a mathematical formula, have been widely adopted for both wireline and wireless use. Wireless customers include Ericcson (nasdaq: ERICY – news – people ), Matsushita Communication (nyse: MC – news – people ) and Nokia (nyse: NOK – news – people ). Matsushita Communication chose RSA Security’s encryption software to develop security for its phones that support i-mode, the popular wireless Internet service offered by Japan’s NTT DoCoMo.

Full story at Forbes.com

NEW YORK – “We’re entering a quiet period in terms of [merger-and-acquisition] activity for the U.S.-focused carriers,” says Knox Bricken, analyst at The Yankee Group, a Boston-based technology and communications research concern. “Most of them have international partnerships and enough assets to form a national coverage basis.”

Amid the slowdown in wireless mergers, certain smaller, regionally focused carriers will emerge as likelier targets, particularly as they continue to build out their markets.

Full story at Forbes.com

NEW YORK – Though a noted bear, Paul McEntire takes a subdued tone when it comes to the question of whether the market is overvalued. The chairman of Skye Hedge Fund, a $5 million (assets) fund with long and short positions, McEntire concedes that many companies are now good long-term investments, particularly large technology companies with proven business models.

But McEntire, who holds a Ph.D. from Stanford University’s engineering and economic systems department, is less charitable when it comes to companies with speculative business models, especially those carrying a large debt load. One example: Exodus Communications (nasdaq: EXDS – news – people), a provider of Internet hosting services. In its latest fiscal quarter, Exodus reported a loss of $650 million on sales of $349 million.

Exodus carries a whopping $2.8 billion in long-term debt. “If you’ve got over $2 billion in debt, you have $250 million to $300 million in debt service to overcome before you can become profitable,” says McEntire.

The market hasn’t been oblivious to Exodus’ financial situation–even after a recent rally, the firm’s stock is off 84% from its 52-week high.

Full story at Forbes.com

NEW YORK – It has been a rough couple of months for stocks of Internet consulting companies. Former stars like Razorfish now trade at a fraction of their 52-week highs.

“The fourth quarter is not going to be an easy one for this group of stocks either,” warns Steven Birer, senior e-services analyst at Robertson Stephens.

Robert St. Jean, Internet and information technology services analyst at J.P. Morgan, points to several sector difficulties, including a drop-off in information technology spending by both dot-com and legacy companies, heavy staff turnover brought on by underwater stock options, and pressure to reduce fees. “When that sense of urgency goes away,” St. Jean notes,” clients tend to be a little more price sensitive.”

St. Jean thinks that the industry’s problems are short term in nature and will be offset by new demands, notably the development and implementation of wireless technologies.

Full story at Forbes.com