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Altera: Can This Semiconductor Stock Come Out of Its Slump?

June 03, 2014 | About:
kcpl

kcpl

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Altera (ALTR)'s performance has been weak as shares are down almost 9% so far this year as compared to peers such as Xilinx (XLNX) and Lattice Semiconductor.

These three companies make programmable chips that can be bought by customers and then programmed according to their needs. But Xilinx and Lattice seems to be making all the right moves.

Not a Rosy Picture

Last month, Goldman Sachs downgraded Altera’s rating from "conviction buy" to "buy" owing to a belief that Altera could face some short-term weakness. Further, Altera’s quarterly report was not robust either. Revenue lowered 10% from the year-ago period and earnings dropped 24%. The company released the guidance for revenue of around $441 million at the mid-point, which was far behind the $473.66 million expectation.

Therefore, it seems like it’s all unstable conditions for Altera currently. However, patient investors might be interested in Altera with the stock trading pretty close to its 52-week low and being the cheapest among the three at 22 times earnings. The long-term prospects are not that bad, and taking into account the fact that Altera offers a dividend yield of 1.90%, it could be a good buy over the long run.

Better Prospects Ahead

The weak performance of Altera’s telecom and wireless business led it to reduce its guidance below consensus estimates in the previous quarter. The company reported that it experienced fewer orders from this segment due to lack of a strong catalyst in the short run. This is surprising considering the expectation from Altera to benefit strongly from China Mobile’s TD-LTE roll out.

Huawei and ZTE commanded a major share of the telecom market when China Mobile rolled out initial contracts worth $3.2 billion for its TD-LTE network build-out earlier this year. These two are main customers of Altera and investors were expecting it to benefit. However, China Mobile deployment might take some time to benefit Altera.

According to management, the traditionally longer design qualification cycle that’s seen in the telecom sector is leading its high-end products to take more time to go into production. However, looking at the huge opportunity in China the long-term investor shouldn’t feel discouraged as it might take a bit longer to materialize.

The TD-LTE roll out of China Mobile is expected to build 207,000 base stations across 31 provinces. Going forward, the company has a lot of ground to cover with the launch of TD-LTE in Beijing, Guangzhou and Chongqing this month. The LTE market in China is expected to grow 127% with China Mobile leading the charge, according to Infonetics. This might increase the competition as other telcos would need to brush up their infrastructure, leading to higher telco spending in the future.

Winning Market Share

Looking at the weaknesses of Xilinx, there’s a possibility that Altera might win market share from it. This weakness in its telecom business last quarter is a result of a transition at one of its customers. Going forward, analysts believe that Xilinx is losing this spot to Altera, and management itself believes that there might be more transitions that might benefit the company.

It is believed that Altera’s strong product development pipeline has enabled it to grab the market share from Xilinx. Whereas Xilinx is focusing on the development of 20-nanometer chips, Altera has is in the process of developing chips on Intel's 14-nanometer platform. This platform is believed to help it capture close to 50% of the industry's revenue in the next five years.

Moreover, Altera is further becoming a huge threat for Xilinx with its progress for 20-nanometer platform, for which it has already landed design wins in line with its current product line up.

The Bottom Line

Altera has been a losing stock this year but patient investors might enjoy the benefits in the long run as it has some promising opportunities ahead of it. The stock is cheaper now as compared to its peers and it also pays a dividend, making it a stock of choice for investors in the long term.


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