Atmel's Investment Case Is Touch And Go

By Stephen D. Simpson, CFA | January 15, 2012 AAA

For years bears have been waiting for Atmel (Nasdaq:ATML) to come up with some sort of product to really stand out from the crowd. Now that they have it, the worries have shifted to whether the company may become too dependent on them and risk losing share to a host of would-be rivals. Although Atmel is not the safest pick in the chip space, several potential market rebounds could drive better results in 2012 and 2013.

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Good Touch and Bad Touch
Atmel's maXTouch solutions for touchscreen controllers have definitely spiced up its microcontroller business, though it is not the largest business yet. In this case the name is pretty self-explanatory; maXTouch chips allow for the touchscreen interfaces that are now so commonplace in smartphones and tablets. Atmel has garnered an early lead in this fast-growing market, in part due to technology good enough to get it in eight of the top 10 phones in early 2011.

The problem, though, is that no good chip market goes under-penetrated for long. Cypress (NYSE:CY) was never too far behind Atmel and Synaptics (Nasdaq:SYNA) is no weak sister either. Making matters even worse, a host of larger companies are in (or getting into) the market as well, familiar names like Texas Instruments (NYSE:TXN), Broadcom (Nasdaq:BRCM), Maxim (Nasdaq:MXIM) and now Nvidia (Nasdaq:NVDA).

With more competition comes more worries about competitive displacements. Although Atmel has actually been doing quite well in design wins in phones, tablets and game platforms, more attention has gone to the bad news, particularly losing the Samsung Nexus S to Melfas or the Amazon (Nasdaq:AMZN) Kindle Fire to Synaptics. (For related reading, see 2011 In Review- The Year In Growth Technology.)

Resets Across the Board
Atmel is getting no favors from the fact that any tablet that isn't Apple (which the company does not supply) isn't really selling right now. At the same time, the company's more traditional microcontroller business is caught up in the sector-wide malaise, as is the company's RF and automotive business. That led to a tough September quarter and the inventory corrections that necessitated will likely weigh on the December quarter, as well.

On the other hand, the hope across chip-land is that the industry is bottoming out. End-users in industrial and auto markets have run down their inventories and order rates should be picking up in 2012, so long as the economy doesn't slide into recession. Couple a general industry recovery with the fact that Atmel has been securing design wins along the way, and 2012/2013 could see a healthy recovery for this name.

Reasons for Optimism, Tinged with Caution
Although price and integration are always going to be risk factors for Atmel's growing touch business, Atmel is fighting back by staying close to the leading edge of technology. A recently-released new maXTouch chipset supposedly has more channels than rival offerings from Synaptics and Cypress. Later in 2012, Microsoft (Nasdaq:MSFT) will release Windows 8 and the fact that this software supports touch could lead to the expansion of touch functionality into notebooks.

The Bottom Line
Atmel's valuation suggests that the Street is down on the company's prospects of maintaining growth in touch, to say nothing of growing its other microcontroller and RF/auto businesses. To wit, the company's valuation is rather similar to that of ON Semiconductor (Nasdaq:ONNN); a company that looks to have greater challenges in 2012 and lacks the sizzle of a product line like maXTouch.

Cash flow modeling in a cyclical industry like chips is tricky and always somewhat subjective. Nevertheless, Atmel looks today as though it could be a low-teens stock trading in the single-digits. Although there is a risk that the fourth quarter will come in low, any short-term disappointments on that score could be a long-term opportunity for new investors. (For related reading, see 4 Attractive Tech Stocks Heading Into 2012.)

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

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