Altera Slips, but Does It End Here?

Altera (Nasdaq: ALTR  ) , the manufacturer of electronic chips, came out with its third-quarter results showing a fall in profits. This comes at a time when most of the companies in the semiconductor space are taking it on the chin. Let's take a look at how Altera is holding up.

Figuring it out
The company saw its sales decline 1% from the previous year's quarter to $522.5 million, while net income also saw a decline by 15% to $185.4 million. The main cause of these declines was on account of customers aggressively cutting down on inventory as they expect a slowdown in their business caused by the weak state of the global economy.

But Altera is not alone. Industry peer Xilinx also saw its revenues decline, but by 10% to $555.2 million, while its net income was also 26% lower at $126.3 million. This was mainly because of lower-than-expected demand from customers.

Lattice Semiconductor, on the other hand, saw revenue rise 6% to $81.7 million. Although sequentially, this figure was down 3%. The company's net income also fell by 13% to $13.3 million mainly because of weak demand in the telecommunications industry to which it caters.

More pain for chips
The evidence of a weakening business environment for chip manufacturers seems to be growing with every profit-warning bomb being dropped by chip companies. These include the likes of Texas Instruments, Lattice Semiconductors, Intel, FormFactor, and even Altera, which have seen their managements come out with profit warnings for the current quarter. The industry has been hit hard as demand for electronics has slowed down in places such as Europe because of economic fears. On the bright side, some of the pain is expected to ease up soon.

For microprocessor designer ARM, the build-up of inventory by electronic manufacturers would wind down soon. Even French chip manufacturer STMicroelectronics said it anticipates things returning to normal by the second quarter of 2012 as stockpiles get cleared.

However, on the demand side, things may not be too exciting in 2012 as the world continues to reel under the weight of the U.S. and European debt crises. To top that, the high unemployment levels and the general air of economic uncertainty have spooked many consumers out of gadget stores. As a result, research firm iSuppli cut its forecast for growth in the semiconductor markets from 2.9% it had predicted earlier to just 1.2%.

The Foolish bottom line
Given the poor conditions of the semiconductor market, Altera may continue to see more downside for the short term. However, since some of the woes are expected to disappear by the second quarter of 2012, it might be a good idea to invest at current levels. Nevertheless, I would reckon this is a risky move given the level of uncertainty surrounding the European economy. For that reason, I would continue to remain cautious until some good news emerges on the economic front.

So what do you Fools think of this? Let us know by leaving your comments in the box below.

Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of FormFactor, Intel, and Texas Instruments. Motley Fool newsletter services have recommended buying shares of FormFactor and Intel. Motley Fool newsletter services have recommended creating a bull call spread position in FormFactor. Motley Fool newsletter services have recommended creating a bull call spread position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.