Altera (ALTR, Financial) is having a solid run in the FPGA market; recently, the stock had its “market outperform” rating restated by stock analysts at JMP Securities in a report issued on Friday. They currently have a $47 price objective on the stock, up from their previous price objective of $45. JMP Securities’ price objective points to a potential upside of approximately 28.84% from the company’s current price. Besides JMP, other analysts have also reiterated a positive outlook for the stock on the back of robust second quarter results reported by the company as well as the future opportunities.
Altera last released its earnings data on Thursday, July 24th. The company reported $0.41 EPS for the quarter, beating the Thomson Reuters consensus estimate of $0.37 by $0.04. The company had revenue of $491.50 million for the quarter, compared to the consensus estimate of $480.22 million. During the same quarter last year, the company posted $0.31 earnings per share. Altera’s revenue was up 16.5% compared to the same quarter last year. The double-digit revenue growth from the new products helped the company to announce such robust results. The performance by its 28 nm FPGA and 40 nm products came in better than expected and catapulted Altera’s topline.
Securing partnerships
In its earnings call, Altera’s management pointed out that it is forging partnerships with several key customers, especially in the area of software-defined networking and server acceleration. One of its key customer includes Microsoft Corporation (MSFT, Financial),who is seeking to accelerate portions of Microsoft's Bing web search engine. Based on the results of this collaboration, Bing plans to roll out Altera FPGA-accelerated servers to process customer searches in one of its data centers starting in early 2015.
Altera's FPGAs accelerate the processing of large amounts of data on servers, which helps address big data challenges and massive distributed workloads. Altera's view of the software defined data center is that FPGAs are helping drive the transformation of the modern data center with a virtualized infrastructure delivered as a service using commodity servers. In this environment, FPGAs can deliver performance advantages, in some cases orders of magnitude improvements, with significantly lower power consumption than alternative approaches. A data center with reconfigurable fabric enabled by Altera FPGAs provides greater business agility, and its complexity can be managed as it scales.
In fact looking forward, Altera expects the server market to be one of its fastest-growing opportunities. The company is counting on the increasing demand for acceleration applications, along with search, compression, and encryption, to drive its revenue in the data center and cloud market.
Getting ahead
Quite recently, there were observations that Altera was taking market share from its rival Xilinx (XLNX, Financial) and the last quarter results reported by Altera support that. While Xilinx had a tough quarter, the disappointing forecasts for Q2 2015 have only dented the confidence of investors. Much like Altera, Xilinx’s performance has been driven by its 28-nanometer product family. This chip platform is seeing heavy demand in the Chinese markets because of the LTE rollout, and both these semiconductor companies have lucrative opportunities in that market.
Altera, however, believes that companies will shift to the 20-nm platform going forward, and finally to the 14-nm platform. The company is already shipping samples of its 20-nm products to customers, and it has started testing the 14-nm chips that are based on Intel's (INTC) Tri-Gate technology. Now, Xilinx also ships its 20-nm products and in fact it began doing so in the last year itself. But, Altera believes that its superior software configuration can help it beat Xilinx. While Xilinx shipped its 20-nm chips to market ahead of its competitor, the circuit architecture is not yet widely used, and Altera's own 20-nm offering may enjoy greater support due to software advantages on the company's platform as mentioned by the company itself.
On top of declining traction of 20-nm chips, Xilinx is also lagging in sales of its 28-nm family of chips. Altera's 28-nanometer chip platform grew 30% sequentially, indicating that the product is gaining traction. Xilinx, meanwhile, is faltering, as sales of its 28-nanometer chips were down slightly on a sequential basis in the first quarter. Looking ahead, there's a strong possibility that Altera will be able to cut into Xilinx's market share further on the back of its product development moves.
Takeaway
Currently, Altera is trading at a forward multiple of around 20, which makes it a justified buy in keeping with the massive opportunities that await the giant. Its balance sheet is also in good shape, with $2.81 billion in cash, $1.49 billion in debt and a strong current ratio of 5.73. Additionally, the company raised its quarterly dividend by a hefty 20% after reporting solid results and, therefore, carries a yield tag of approximately 2.20%. Therefore, Altera is good investment candidate considering that Xilinx faces comparatively higher risks and consequently, more downside.
