Here's a riddle for investors: when is bad news actually good news? The answer: When the bad news is less bad than already feared. That very much seems to be the case for Atmel (Nasdaq:ATML) this Friday, as this small semiconductor's stock has actually held up quite well, despite a sizable revision to sales guidance for the fourth quarter.

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The Bad News
Atmel announced that fourth quarter revenue was going to be approximately $384 million for the fourth quarter; not only down 20% from the third quarter, but quite a bit lower than the average analyst estimate ($412 million) and the lowest estimate ($403 million).

Management cited a delayed distributor payment as a proximate cause, but the size of the payment explains less than half of the shortfall. Given the tenor of reported industrial sales (as opposed to forward guidance) from other semiconductor stocks this quarter, like Texas Instruments (NYSE:TXN) and Fairchild (NYSE:FCS), it won't be surprising if that played a role.

Also recall that this wasn't a scintillating quarter for smartphones or tablets outside of Apple (Nasdaq:AAPL), and Apple accounted for a lot of the industry's growth this quarter. That means that Atmel's touch controller customers weren't seeing such great shipment growth.

Already Factored In?
Given that estimates on Atmel had been heading steadily downward, it seems like a lot of this revision was already factored into the expectations. The question now, though, is where Atmel sits relative to its rivals.

Synaptics (Nasdaq:SYNA) seems to be seeing a little more momentum, and Silicon Labs (Nasdaq:SLAB) is definitely gaining share, but both are stronger on the lower end of the market. At the same time, it looks like fellow higher-end competitor Cypress (NYSE:CY) may be in a bit of a lull in terms of placement wins. Keep in mind, too, the risk of companies like Nvidia (Nasdaq:NVDA) and Broadcom (Nasdaq:BRCM) entering the market for touch controllers, and the risk that major customer Samsung will start designing (and using) its own controllers, taking away a major Atmel customer. (For related reading, see The Telecommunications Industry.)

The Pause that Refreshes?
When I last wrote on Atmel, I did mention the risk of a disappointment in fourth quarter results. Honestly, as a non-owner of the shares I was hoping for a more negative reaction and the opportunity to see a cheaper price for a new addition to my portfolio.

As 2012 goes on, I believe that Atmel will see strengthening markets for its MICU products (especially in industrial) and perhaps also some notebook/ultrabook design wins tied to the release of Windows 8 and its support for touch functionality. I'm also cautiously optimistic that Atmel will reverse its recent trend of losing slots in high-end phones

The Bottom Line
When it comes to value for money, it's hard to argue with buying Broadcom or Qualcomm (Nasdaq:QCOM) today. That said, I do believe that Atmel is undervalued and could be one of the more interesting chip stories in 2012. There are definitely some risks here, though, so investors should keep that in mind when contemplating the shares for their own portfolios.

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

Tickers in this Article: ATML, BRCM, SYNA, CY, SLAB, TXN, NVDA, APPL, FCS, QCOM

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