What's wrong with the IPO market? Besides the fact that the Nasdaq is in complete disarray, lately the problem seems to be the growing number of recently public companies joining the chorus of those firms announcing earnings disappointments.

Take, for example, Chippac (Nasdaq : CHPC), which on Tuesday said its fourth-quarter results would fall far short of expectations -- 3 cents per share versus the 18 cents per share expected. That's disappointing enough. But to an IPO pipeline already on life support, the news may have been even more damning to the backlog of companies that also outsource services to a slowing semiconductor market. Although Chippac's earnings confession is nothing new, investors reverted to their old habit of dump first, ask questions later.

The massive sell-off on Wednesday sent shares of the Santa Clara, California-based company tumbling $4.44, or 60 percent, to a close of $2.94. Not surprisingly, the news was met by downgrades from Wall Street analysts such as Merrill Lynch, Deutsche Banc Alex. Brown, Thomas Weisel Partners, and Robertson Stephens. Will investors be more patient for IPO candidates such as Artest (Nasdaq : ARTE), Advanced Thermal Sciences (Nasdaq: ATSC), and Tessera (Nasdaq : TSRA)? Not likely. All may be forced to look elsewhere for capital or wait until the cycle turns in their favor.

Choppy demand, earnings shortfalls, and sector downgrades are clearly not the types of sound bites that companies in the pipeline want to hear. Even if these companies are in slightly different niches than Chippac, investor fears over slowing semiconductor sales are enough to deflate valuations and slam down the window on any more players in the space getting to the market.

PLEASE DON'T CALL IT A SLOWDOWN

While Chippac attributed its shortfall to weakness in the wireless and computing markets, and end-of-the-year inventory adjustments by several customers, Eric Gomberg, an analyst for Thomas Weisel, says investors might be overestimating the impact. Although Mr. Gomberg agrees these two elements are the source of earnings slowdowns for outsourcers like Chippac, he feels investors may be underestimating the impact of manufacturers stockpiling a large inventory of semiconductors earlier this year when the supply in the market became extremely tight.

Now that these inventories are beginning to diminish, he believes the purchase orders will increase again and thereby revive demand for packaging and testing equipment. And while Chippac is going to face tough times over the next couple of quarters, Mr. Gomberg believes there is definitely a buying opportunity among some of these outsourcers, especially for investors with a long-term investment horizon.

Certainly there are reasons to view Mr. Gomberg's comments with a degree of skepticism, given the fact that his firm served as one of the underwriters on Chippac's August 9 IPO. But he says there is no better value among these outsourcers than Amkor Technology (Nasdaq : AMKR), Chippac's chief competitor. With control of nearly 30 percent of the market, Mr. Gomberg says Amkor is clearly head and shoulders above the competition, which also includes ST Assembly Test Services (Nasdaq : STTS) and ASAT Holdings (Nasdaq : ASTT). After a terrific run in 1999, Amkor has seen its stock fall 76 percent from a high of $64.56 on March 23 to a current price of $15.44.

While Mr. Gomberg understands investor fears over the risk in the sector, he believes it's important to note that Amkor's earnings before interest, tax, depreciation, and amortization (EBITDA) has grown by 20 percent over each of the past six years, something he suggests shows the company's ability to survive in the intensely cyclical world of the semiconductor industry.

OUTSOURCING UPSIDE

Clearly the cyclical nature of the semiconductor market will be more difficult than ever for investors to gauge as the PC and wireless sectors continue to revise their own growth prospects. But that does not mean that outsourcers like Chippac and Amkor should be looked at as just more victims of slowing growth. Outsourcers remain essential to the semiconductor industry, especially as consumers continue to opt for less-expensive handheld computing devices like the Palm Pilot, Internet phones, or Blackberry email devices over PCs.

"As long as the semiconductors get smaller, faster, and run hotter, the need for better packaging is going to continue," says Mr. Gomberg. As such, outsourcers must continue to identify niches in which they can develop core competencies and take advantage of the new intricate specifications that manufacturers are sending to the semiconductor makers -- or else life in the public markets for these newcomers could be very short.