Is Atmel Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Atmel (NASDAQ: ATML  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Atmel's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Atmel's key statistics:

ATML Total Return Price Chart

ATML Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

(1.4%)

Fail

Improving profit margin

78.6%

Pass

Free cash flow growth > Net income growth

(48.6%) vs. 78.9%

Fail

Improving EPS

77.4%

Pass

Stock growth (+ 15%) < EPS growth

51.3% vs. 77.4%

Pass

Source: YCharts. * Period begins at end of Q2 2010.

ATML Return on Equity Chart

ATML Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

83.5%

Pass

Declining debt to equity

No debt

Pass

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we're going
Atmel hits some positive notes, but was tripped up by both its revenue and free cash flow metrics. Despite net income growth surpassing that of free cash flow during our tracked period, Atmel's trailing 12-months free cash flow is actually the only metric of the two that's remained in positive territory for the past three years. Five out of seven possible passing grades is fairly strong, and Atmel has a chance to attain a perfect score next time around. How might Atmel boost its revenue and resume free cash flow growth over the next few quarters? Let's dig a little deeper to find out.

Atmel posted a year-over-year gain of 6% net revenues in its latest quarter, which is one indication that the company is moving in the right direction. Longtime Fool contributor Selena Maranjian also notes that Atmel has been boosting its profit margins on the back of cost-savings and improving business conditions. In addition, Atmel has very large order backlogs, which can effectively contribute further revenue in the $339 million to $355 million range. Sustained demand for mobile devices and tablets should certainly help sustain interest in its chips over the next few quarters.

Atmel manufactures the sensor hub for Samsung's Galaxy S4, and can also capitalize on the growing Chinese smartphone market through placements inside ZTE's and Xiaomi's phones. Atmel also provides the maXTouch controller for BlackBerry's Q10. However, the company has lost its bid to supply chips for a number of core Apple products to rivals Cypress Semiconductor and Texas Instruments, which could, more than anything, undermine the company's efforts at recovery.

Early this year, Integrated Device Technology sold its smart metering business to Atmel. Fool contributor Rich Duprey notes that the acquisition will augment its existing offering of smart metering chips. According to Pike Research, annual smart grid revenue will reach $73 billion by 2020, which gives plenty of space for Atmel to grow.

Putting the pieces together
Today, Atmel has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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