Shares in Wolfson Microelectronics, the Scottish microchip maker for many of the world's must-have electronic consumer gadgets, tumbled more than 6% yesterday as Merrill Lynch cut its rating on the company to "underperform" on valuation grounds.

Shares in Wolfson Microelectronics, the Scottish microchip maker for many of the world's must-have electronic consumer gadgets, tumbled more than 6% yesterday as Merrill Lynch cut its rating on the company to "underperform" on valuation grounds.

However, Merrill's broker note also raised the price target on the Edinburgh-based technology group to 87p from 80p.

Wolfson's shares yesterday tumbled 5p, or 6.2%, to 75.5p.

The broker noted that Wolfson's stock has rallied since the chip designer's third-quarter results at the end of October.

Overall this year, however, shares in the maker of microchips for mobile phones, MP3 players, Playstations and satnav systems have performed poorly amid a series of grim forecasts set against an economic climate that has sliced deeply into profitability across the consumer electronics sector.

In spite of the recent rally, Wolfson's share price remains a far cry from the 469p it hit in September 2006.

Nonetheless, Merrill Lynch said that while Wolfson's relatively large cash balance should continue to offer support to the stock, the limited valuation upside compared with other stocks under its coverage and potential further earnings risk make it more cautious on the stock.

Wolfson's chips are best known for tasks such as converting digital data into analogue signals for speakers.

They are key components of portable listening and communications devices, such as Apple iPod music players, iPhone and other multimedia mobile phones.

Wolfson also provides the chips for DVD players, flatscreen televisions, digital radios and similar items.