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Why Altera Is the Best Pick in the Semiconductor Industry

July 05, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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Altera (ALTR) has achieved it again. The programmable logic devices maker came out with strong results for the first quarter, beating Street estimates by a big margin. Altera has been a consistent performer over the past few quarters because of its innovative product portfolio.

Driven by a foundry agreement with Intel (INTC), Altera is gaining share in the field programmable gate array, or FPGA, market. As such, it should continue outperforming the likes of Xilinx (XLNX) going forward and maintain its streak of impressive performances.

Beating competition

Altera's performance in the recently reported first quarter was much better than Xilinx. Its revenue grew 12% year-over-year to $461 million, comprehensively ahead of the $438 million consensus target. Earnings, meanwhile, came in at $0.37 per share, while analysts were looking for $0.32.

Altera's outlook was also strong. The company expects revenue in the range of $470 million-$488 million in the ongoing quarter, blowing past the $461 million estimate. In comparison, rival Xilinx's performance left a lot to be desired. The company's earnings missed estimates, and its revenue outlook for the current quarter also lagged expectations, as it saw a drop in orders from a couple of large communication customers.

Hence, Altera seems to be executing better than Xilinx. Going forward, considering Altera's product development efforts, there's a strong chance that it will be able to overtake Xilinx in the programmable logic devices market.

Fresh products

Altera's new products now account for almost half of its total revenue. The 28-nanometer process has been the primary driver for Altera so far, and the company seems to have successfully taken away some market share from Xilinx in this area. While Xilinx cited delays in LTE deployment as the reason behind its sluggish performance in the previous quarter, Altera was singing a different tune.

In fact, the roll out of LTE by China Mobile (CHL) resulted in 20% sequential growth in Altera's wireless business. In addition, Altera is also counting on the growing adoption of 3G in India and other developing countries to propel its business higher.

The company's focus on making its production processes more efficient has helped it land some solid design wins. Altera has already started sampling its 20-nanometer process with customers, extending its chip portfolio further. However, it is the 14-nanometer FinFET process technology that's expected to become a major growth driver for Altera going forward.

Altera is developing chips based on the 14-nanometer platform, using Intel's foundry. This month, Altera showcased its FPGA technology, based on Intel's 14 nm Tri-Gate process. The company has seen some positive cues early on in the design process, which should accelerate the time to market for 14-nm chips.

Intel has played a key role in the development of this platform, offering its true die shrink based on the second-generation 14-nm Tri-Gate process. According to Transparency Market Research, the FPGA market is a huge opportunity since it is expected to grow to almost $9 billion over the next five years. Now, through this technology, Altera is planning to capture half of the FPGA market by 2019.

Takeaway

In conclusion, Altera's strong fundamentals, and the fact that it returns a good amount of cash to investors, makes the stock highly attractive. The company's debt of $1.49 billion is easily covered by its cash position of $3 billion, while a dividend yield of 1.70% isn't bad either. Since Altera has a payout ratio of just 37%, there's a good chance that it might increase its dividend in the future. The company plans on returning 60%-80% of its cash flow from operations to shareholders by way of dividends and share repurchases.

Altera has been consistently good, and its product development could lead to further improvements. The company has an ambitious plan of becoming the leader in the FPGA market, and it is working aggressively toward it. Moreover, Altera's shareholder-friendly moves make the stock even more attractive, and it could turn out to be a solid long-term investment.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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