Taking Stock: Altera's Bouncing Back, But Its Stock Is Still Overvalued - InformationWeek

InformationWeek is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them.Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

04:25 AM

Taking Stock: Altera's Bouncing Back, But Its Stock Is Still Overvalued

Company's quarter reflects signs of life in semiconductors

I had to find my dictionary the other day. There it was: G-r-o-w-t-h. I hadn't forgotten the meaning; I just wanted to make sure the word still exists. Because growth really appears to be returning to the semiconductor industry, albeit slowly.

Altera Corp. (ALTR - Nasdaq) is the latest semiconductor company to report growth in its recent quarterly earnings report. Altera builds programmable logic, which can be changed during a design or product cycle to let a company modify an existing product. Normal semiconductors, such as Intel microprocessors, have the circuits etched into the various layers of the chip. This means that they're faster but also that mistakes can't be corrected later. As with everything else in life, there's a trade-off: The drawback with programmable logic devices has always been a higher price per unit and slower performance.

Programmable logic devices are widely used in wireless base stations, routers, and other telecom equipment, as well as enterprise networking equipment and various automotive and industrial applications. Given these markets, Altera's revenue ballooned during the tech-telecom bubble.

The longer-term prospects of the programmable logic industry are still solid. Programmable logic devices continue to take market share from other types of semiconductors, which should lead to an industry growth rate of more than 20% per year.

Altera has two basic lines: complex programmable logic devices, and field programmable gate arrays. Complex programmable logic devices are an older technology that doesn't scale well. In 1994, Altera sold nothing but these devices. Since then, the company has made headway into the field programmable gate arrays market. The revenue split is roughly two-thirds field programmable gate arrays and one-third complex programmable logic devices. Field programmable gate arrays perform the same tasks as complex programmable logic devices, although the architecture is different and the performance is better.

Until recently, Altera suffered from having inferior field programmable gate arrays products relative to rival Xilinx Inc. (XLNX - Nasdaq). Under John Daane, who was named CEO of Altera in late 2000, Altera launched the Stratix line of processors, which is at least as good or better by most measures when compared with Xilinx's Virtex line of field programmable gate arrays. Virtex has been available for some time, which has let Xilinx capture a disproportionate share of third-generation wireless designs. Now that Xilinx has a solid position at many companies, Altera must make inroads with its sales to the wireless industry. Xilinx also has become a bigger company, generating $273.5 million in revenue this past quarter, compared with Altera's $171.96 million revenue.

Xilinx and Altera used to have a testy relationship, with each filing a number of patent-infringement lawsuits against the other. To the credit of Daane and Wim Roelandts, CEO of Xilinx, the companies reached a settlement that encompasses all patent litigation.

This quarter, Altera's sales increased 5.8% relative to the previous quarter, and the company says revenue should be up by a similar amount in the next quarter, based on a solid order backlog. This is good news. Markets such as wireless, storage, and computers accounted for most of the growth, with demand for chips for telecom equipment remaining weak. Altera appears to have inventory under control and sales and demand in line. Gross margin stayed at a healthy 60%, despite the travails of the industry. Earnings per share came in at 5 cents, a penny ahead of analysts' expectations.

Altera is enjoying the momentum of having a new CEO, new products, and the early signs of industry recovery, but the stock looks expensive at around $21. Trading at close to 11 times 2002 forecasted revenue and at 88 times this year's earnings per share, it's not exactly cheap. Looks like some of the bubble valuation lingers on.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected]

We welcome your comments on this topic on our social media channels, or [contact us directly] with questions about the site.
Comment  | 
Print  | 
More Insights
The State of Cloud Computing - Fall 2020
The State of Cloud Computing - Fall 2020
Download this report to compare how cloud usage and spending patterns have changed in 2020, and how respondents think they'll evolve over the next two years.
InformationWeek Is Getting an Upgrade!

Find out more about our plans to improve the look, functionality, and performance of the InformationWeek site in the coming months.

11 Things IT Professionals Wish They Knew Earlier in Their Careers
Lisa Morgan, Freelance Writer,  4/6/2021
Time to Shift Your Job Search Out of Neutral
Jessica Davis, Senior Editor, Enterprise Apps,  3/31/2021
Does Identity Hinder Hybrid-Cloud and Multi-Cloud Adoption?
Joao-Pierre S. Ruth, Senior Writer,  4/1/2021
Register for InformationWeek Newsletters
Current Issue
Successful Strategies for Digital Transformation
Download this report to learn about the latest technologies and best practices or ensuring a successful transition from outdated business transformation tactics.
White Papers
Twitter Feed
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.
Sponsored Video
Flash Poll