A BET ON A

company with dominant market share in an industry enjoying spectacular growth should be an investment that couldn't possibly go astray. And yet shares in

SiRF Technology Holdings

The fundamentals for all things GPS are so strong that SiRF looked like a sure thing. So-called personal navigation devices of the type made by Garmin and TomTom are expected to top 100 million units in three years, according to ABI Research, up from about 25 million in 2007. But the really big play is in handsets. The GPS-enabled cellphone market is forecast to more than double by 2012, hitting 550 million units. Put it all together and GPS chipset revenue is expected to more than double to $1.3 billion in just three years time, according to In-Stat.

Money on that market seems like a no-lose proposition, but it's hardly worked out that way for SiRF. Shares that were trading north of $30 in early November go for less than $5 now. Earlier in the week the company cut its revenue forecast and announced layoffs because of weaker-than-expected demand. It's no secret the economic downturn is hurting automobile and gadget sales. Budding competition is also taking a toll.

"In our view, SiRF's preannouncement is indicative of the extent of demand weakness in the consumer electronics segment," Heidi Poon, an analyst with Thomas Weisel Partners, wrote Tuesday. "Although we believe SiRF will continue to benefit from projected [personal navigation device] unit growth this year, we expect intensifying competition to pressure both pricing and market share."

As for the competition, there's no distinct No. 2. SiRF is being pursued by a posse of names. In addition to Broadcom, Atheros Communications and STMicroelectronics, among others, giants Qualcomm and Texas Instruments are getting involved on the handset side.

So even though SiRF's the market leader, there's no shortage of plays in the sector. But that doesn't make investing in the space any easier. That's partly because of the bane familiar to any longtime semiconductor investor: an inexorable slide in chipset prices. They're falling about 20% year over year. "Commoditization and pricing pressures are par for the course for investors in the semiconductor industry," says Ramesh Misra, an analyst with Collins Stewart.

True, SiRF also had the misfortune of placing its chips on the wrong bet. The outsized industry growth is disproportionately driven by GPS in cellphones. The good news there is that SiRF supplies the GPS chips for Research in Motion's BlackBerry handsets. Although the seemingly ubiquitous devices are enjoying strong market-share gains, they're high-end and the big money lies in the middle of the market. That's where the bad news comes in. SiRF staked its claim to the midmarket by partnering with Motorola. Moto's handset business has become such an albatross that the company is splitting it off.

The Motorola deal notwithstanding, a company with 70% market share in a gold-rush business like GPS isn't supposed to fall so far so fast. And that's where SiRF offers an important lesson. ABI Research figures that average selling prices for GPS chips will continue to fall, but strong volume growth will more than offset the erosion in prices.

That's all well and good, but it doesn't much help the average investor today. At least not until the industry shakes itself out. SiRF's plummeting share price makes it pretty clear that trying to figure out which companies will actually benefit from the tremendous industry fundamentals is too much of a gamble. That's how it is with chip stocks in a hot but immature market.

"It's not an unfamiliar story in the chip sector," Misra says. "The same story played out with video processing chips for LCD displays. And it played out a number of years ago in the graphics chip space. There was significant consolidation and now there are essentially two players."

Sure, SiRF could turn things around. A partnership with Nokia, the world's biggest handset maker, would certainly please the Street. But at the moment Nokia is collaborating with pretty much everyone and has its own good reasons for maintaining the status quo. The best hope for SiRF shareholders in the short term is probably an acquisition by a bigger semiconductor company. Call it a shakeout takeout.

For long-term investors, betting on GPS chip makers doesn't seem worth the risk. After all, if SiRF couldn't capitalize on its advantage, what hope is there in panning for the winner or two among all the other companies jumping onto the field? When it comes to the business of GPS chips, there is indeed gold in them there hills. Good luck finding it, even with a Garmin.