As 2011 winds down, it looks as if few, if any, chip stocks will escape the malaise. Cavium (Nasdaq: CAVM) reported a slowdown in its business just a little while ago, and now Atmel (Nasdaq: ATML) has missed its revenue target and issued sharply lower guidance for the next quarter. Although there are plenty of doubts around this company, and more now with the revised guidance, it's hard to make money in slam-dunk stories; risk-tolerant investors ought to consider stepping up and buying this name on weakness.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Hitting a Wall in the Third Quarter
Atmel announced that revenue rose 15% from last year (adjusting for a spinoff), and was basically flat on a sequential basis, a result that was about 1% shy of the average Wall Street guess. Microcontrollers were fairly strong, up 18% from last year and flat sequentially, with 8-bit showing more sequential strength. Non-volatile memory and RF/auto were both down sequentially, while ASIC showed solid growth, but comprises a small amount of total revenue.

Although Atmel's revenue was not that bad, profitability was not very strong. Gross margin jumped nicely from last year, but slid 70 basis points, sequentially. Adjusted operating income jumped nicely from last year, but slid about 4%, on a sequential basis. The company continues to spend a sizable amount on R&D, accounting for about 13% of sales, while inventory days were flat, on a sequential basis. (To know more about R&D spending, check out: R&D Spending And Profitability: What's The Link? )

Guidance Will Hit the Stock
Management surprised the Street with very weak guidance, that calls for a sequential revenue decline of 12 to 16%. Not only have non-Apple (Nasdaq: AAPL) tablet sales really not taken off at customers like Dell (Nasdaq: DELL) or Lenovo (OTCBB: LNVGY), but a major customer, Samsung, goes through a regular fourth quarter inventory adjustment process, that leads to lower orders. On top of this, it sounds as though chip demand from industrial customers has really slowed. This is a problem not only for Atmel, which gets around 40% of its sales from industrial and auto customers, but also other chip companies, like Linear Technology (Nasdaq: LLTC), ON Semiconductor (Nasdaq: ONNN) and Maxim Integrated (Nasdaq: MXIM).

The Spectre of Competition
Maybe a little late for Halloween, but the spectre of future competition in touch is starting to spook some investors. Although management raised its maXTouch sales guidance, and there is reason to believe that future adoption in applications like cameras and gaming systems is on the way, there are worries about a shift towards single chip solutions and new entrants.

In addition to known entities like
Cypress Semiconductor (Nasdaq: CY), Synaptics (Nasdaq: SYNA) and Microchip (Nasdaq: MCHP), Silicon Labs (Nasdaq: SLAB) is moving further into the space; it ships for the Samsung Galaxy Y phone already. Likewise, Maxim, Texas Instruments (NYSE: TXN) and Broadcom (Nasdaq: BRCM) are looking to get into touch controllers, often by integrating them with other chips. Last, and by no means least, Samsung itself is thought to be working on these chips and that could be a serious blow to Atmel, as this is a sizable customer.

It should not be ignored that, even with the announcement that Hewlett-Packard (NYSE: HPQ) is killing the Touchpad, which uses Cypress controllers, Cypress's TrueTouch business seems to have grown about twice as fast, on a sequential basis this quarter (though admittedly from a roughly 15% smaller base), compared to Atmel. Still, Cypress gave generally similar guidance as Atmel for the next quarter and Atmel's guidance on its touch products was arguably more positive, so it isn't clear that Cypress is taking away business from Atmel.

The Bottom Line
Investors don't often get second chances at good growth stories, unless there is a company-specific screw up or a broad market decline; with Atmel, it looks like both. Still, this company has very good microcontroller technology and should have good growth prospects in new markets and with new products, like a recently-announced stylus. It also happens to now be trading below a double-digit enterprise multiple and an EV/revenue of three. (To know more about enterprise multiple, read: Value Investing Using The Enterprise Multiple. )

No good idea comes without competition, and there is certainly now a risk that Atmel goes onto the same roller-coaster tracks as OmniVision (Nasdaq: OVTI) and experiences some of the same volatility that comes from investors worrying about whether OmniVision chips are being replaced by rivals. If you want a cheap stock with growth potential, you have to take on risks, and that is certainly true for Atmel today. Investors looking for less risk should probably look to other cheap stocks like Altera (Nasdaq: ALTR), Broadcom, or Intel (Nasdaq: INTC), but those who have been waiting for a second shot at Atmel, may want to start following this very closely.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center