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Altera's Adjustment No Need For Panic
That these are challenging times in the semiconductor space is hardly news. In fact, flagging demand in markets like industrial, automotive, wireless and base stations has been the dominant story around names like Broadcom (Nasdaq:BRCM), Analog Devices (NYSE:ADI) and Texas Instruments (NYSE:TXN) for most of this year. In that context, then, Altera's (Nasdaq:ALTR) downward revision of third quarter revenue guidance is not really a cause for panic.
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The Dirty Details
Altera announced late Tuesday that in place of the 2% to 6% sequential growth management expected for the Q3, sales were on a path to deliver something between a 3% contraction to 1% growth. Take the midpoint of that range, and Altera will fall short of the previous average analyst guesstimate by about 5%.
Altera blamed a fairly broad array of underperforming markets for the miss. Industrial automation, military and test were all cited, as well as the telecom and wireless niches. Given that the latter two are about half of Altera's revenue base, that's the story that matters.
The Unsurprising Surprise
An interesting tidbit jumps out from the analyst reports this morning. While very few analysts had this sort of performance pegged (the bottom of the prior analyst estimate range is the midpoint of management's new estimate range), a surprising number of analysts are saying that the performance was not so surprising and that investors should not panic. It is certainly worth asking these analysts why they didn't move their numbers down before this (if it was "not so surprising"), but that's a topic for another day.
The reality, though, is that the market actually does look like it had been pricing in this news. Ericsson (Nasdaq:ERIC) and Alcatel-Lucent (NYSE:ALU) are both major equipment vendors to the wired and wireless telecom space, and both companies have been talking recently about iffy ordering patterns and "managing down" inventories. Not surprisingly, Altera's stock follows Alcatel and Ericsson relatively closely and moved down when those views first reached the market.
It's not just Altera, either. NXP Semiconductors (Nasdaq:NXPI) sells into many of the same markets as Altera, and the stock has been following a similar trajectory. Not surprisingly, Xilinx (Nasdaq:XLNX), which is Altera's largest and most directly comparable rival, has likewise been traveling in the same band as investors have come to grips with the shorter lead times, lower orders and inventory work-downs.
Bottom Line - When, Not If
Altera's high-density programmable logic chips continue to gain share from ASICs, and the buildout of next-gen communications systems in India, China and the U.S. should continue to support demand for some time to come. What's more, the company holds its own with Xilinx. The companies may leapfrog each other with various product introductions, but Altera does not seem at risk of getting left behind.
The question, then, is whether investors want to step up and buy semiconductor stocks today. In some respects, Altera's downward revision may be one of the last gasps of the market cycle reset. Clearly there's still risk; if the U.S. and European economies continue to fade (and start dragging on major emerging markets as well), a bigger downward reset in chip orders is certainly possible. But in many respects, too many chip stocks are trading too cheaply. Broadcom, Avago (Nasdaq:AVGO), Atmel (Nasdaq:ATML) and ON Semiconductor (Nasdaq:ONNN) come to mind, and Altera arguably belongs there as well. Trying to buy at the bottom is a tricky business, but Altera is the sort of quality company that investors should not pass over when the markets give them second chances. (For additional reading, check out A Primer On Investing In The Tech Industry.)
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Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
The Dirty Details
Altera announced late Tuesday that in place of the 2% to 6% sequential growth management expected for the Q3, sales were on a path to deliver something between a 3% contraction to 1% growth. Take the midpoint of that range, and Altera will fall short of the previous average analyst guesstimate by about 5%.
Altera blamed a fairly broad array of underperforming markets for the miss. Industrial automation, military and test were all cited, as well as the telecom and wireless niches. Given that the latter two are about half of Altera's revenue base, that's the story that matters.
The Unsurprising Surprise
An interesting tidbit jumps out from the analyst reports this morning. While very few analysts had this sort of performance pegged (the bottom of the prior analyst estimate range is the midpoint of management's new estimate range), a surprising number of analysts are saying that the performance was not so surprising and that investors should not panic. It is certainly worth asking these analysts why they didn't move their numbers down before this (if it was "not so surprising"), but that's a topic for another day.
The reality, though, is that the market actually does look like it had been pricing in this news. Ericsson (Nasdaq:ERIC) and Alcatel-Lucent (NYSE:ALU) are both major equipment vendors to the wired and wireless telecom space, and both companies have been talking recently about iffy ordering patterns and "managing down" inventories. Not surprisingly, Altera's stock follows Alcatel and Ericsson relatively closely and moved down when those views first reached the market.
It's not just Altera, either. NXP Semiconductors (Nasdaq:NXPI) sells into many of the same markets as Altera, and the stock has been following a similar trajectory. Not surprisingly, Xilinx (Nasdaq:XLNX), which is Altera's largest and most directly comparable rival, has likewise been traveling in the same band as investors have come to grips with the shorter lead times, lower orders and inventory work-downs.
Bottom Line - When, Not If
Altera's high-density programmable logic chips continue to gain share from ASICs, and the buildout of next-gen communications systems in India, China and the U.S. should continue to support demand for some time to come. What's more, the company holds its own with Xilinx. The companies may leapfrog each other with various product introductions, but Altera does not seem at risk of getting left behind.
The question, then, is whether investors want to step up and buy semiconductor stocks today. In some respects, Altera's downward revision may be one of the last gasps of the market cycle reset. Clearly there's still risk; if the U.S. and European economies continue to fade (and start dragging on major emerging markets as well), a bigger downward reset in chip orders is certainly possible. But in many respects, too many chip stocks are trading too cheaply. Broadcom, Avago (Nasdaq:AVGO), Atmel (Nasdaq:ATML) and ON Semiconductor (Nasdaq:ONNN) come to mind, and Altera arguably belongs there as well. Trying to buy at the bottom is a tricky business, but Altera is the sort of quality company that investors should not pass over when the markets give them second chances. (For additional reading, check out A Primer On Investing In The Tech Industry.)
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by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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