Demand for semiconductors in personal computers, mobile phones and Internet infrastructure is at record levels. So why has Intel's market capitalisation shrunk $150 billion (€174 billion) since March?

In spite of many semiconductor executives' belief to the contrary, equity markets are not irrational. A company's valuation reflects future cash-flows, discounted over time. The outlook for cash-flows may remain good, but not nearly as promising as it was in March.

"It's simple, markets look forward, not backwards," explains Mr Karl Richter, analyst at Lehman Brothers in San Francisco. "Growth remains solid, but nowhere near as strong as had been expected six months ago."

The industry is no longer dependent on a single customer market, the personal computer industry. It now has three legs: PCs, mobile phones and Internet infrastructure.

The outlook for each market has dimmed. First, Nokia and Ericsson, the world's leading makers of wireless handsets, warned that predictions of annual sales of 500 million units were unattainable. Shares in suppliers of handset chips, such as Texas Instruments and Philips, dropped sharply. Then in August, PC makers like Dell Computer warned of lower sales than expected. That helped undermine shares of chip suppliers like Intel and Micron.

Finally, there were warnings of slower-than-expected sales growth from Nortel and Lucent, which used chips in Internet infrastructure. Last week, Cisco Systems warned that although sales had increased 50 per cent inventories had jumped more than 180 per cent.

That could provide a challenge for chipmakers, explains Mr Richter. In August, revenue growth for semiconductors was 53 per cent year-on-year, according to Morgan Stanley Dean Witter. But the broker estimates it could fall to 25 per cent next year. Even a small shortfall in sales can translate into a huge reduction in product prices, hitting cash-flow and profits.

As growth in demand slows, supply is increasing sharply. Despite a slowdown in investment by Japanese chipmakers, capital spending among the leading 80 per cent of chipmakers is expected to jump from $24.8 billion last year to $48.2 billion this year, according to Merrill Lynch.