Is There Value in This Beaten-Down Tech Stock?

Altera's (NASDAQ: ALTR  ) performance in 2013 has left a lot to be desired. Shares are down almost 9% this year. When compared to peers such as Xilinx (NASDAQ: XLNX  ) and Lattice Semiconductor, it looks as if Altera could be one of the worst investments you can make in this particular area of the semiconductor industry.

All three companies make programmable chips that can be bought by customers off the shelf and then programmed according to their needs. But Xilinx and Lattice seem to be the ones that are making all the right moves. Lattice is up 35% this year while Xilinx has gained a respectable 25%, but Altera has languished, and a turnaround could be some time away.

Not a good picture
Last month, Goldman Sachs downgraded Altera from "conviction buy" to "buy," as it believes that the company could face some short-term weakness. In addition, Altera's third-quarter report was not very encouraging. Revenue was down 10% from the year-ago period, and earnings fell 24%. The company guided for revenue of around $441 million at the mid-point, which was way behind the $473.66 million expectation.  

It looks like it's all doom and gloom for Altera right now. However, with the stock trading pretty close to its 52-week low and being the cheapest among the three at 22 times earnings, patient investors might be interested in Altera. The long-term prospects don't look that bad, and considering that Altera sports a dividend yielding 1.90%, it might turn out to be a good buy over the long run.

Better prospects ahead
Altera guided below consensus estimates in the previous quarter, as its telecom and wireless business didn't perform up to the mark. The company said that it saw fewer orders from this segment due to lack of a strong catalyst in the short run. This is quite surprising -- investors would expect Altera to benefit strongly from China Mobile's (NYSE: CHL  ) TD-LTE roll out.

Huawei and ZTE were the biggest beneficiaries when China Mobile doled out initial contracts worth $3.2 billion for its TD-LTE network buildout earlier this year. These two are key Altera customers, and as such, investors were expecting Altera to benefit. However, it might take some time before Altera sees revenue from the China Mobile deployment. 

According to management, its high-end products are taking more time to go into production due to a traditionally longer design qualification cycle that's seen in the telecom sector. However, the long-term investor shouldn't feel discouraged -- there's a huge opportunity in China, even though it might take a bit longer to materialize.

China Mobile is expected to build 207,000 base stations across 31 provinces as it rolls out TD-LTE. This month, the company launched TD-LTE in Beijing, Guangzhou, and Chongqing, which means that it still has a lot of ground to cover going forward. According to Infonetics, the LTE market in China is expected to grow 127% in 2013, and China Mobile is leading the charge. This would give rise to competition as other telcos would need to step up their game, leading to higher telco spending in the future.

Winning market share
There's a possibility that Altera might be winning market share from Xilinx.  Xilinx had seen weakness in its telecom business last quarter as a result of a transition at one of its customers. Analysts suggest that Xilinx is losing this spot to Altera. Also, Altera management believes that there might be more transitions that might benefit the company going forward. 

It looks like Altera's strong product-development pipeline has helped it and advantage over Xilinx. While Xilinx is focusing on the development of 20-nanometer chips, Altera has gone one step up and is in the process of developing chips on Intel's 14-nanometer platform. It expects this platform to help it capture close to 50% of the industry's revenue in the next five years.  

In addition, Altera is looking to make life difficult for Xilinx through its 20-nanometer platform, for which it has already landed design wins in line with its current product lineup. 

The bottom line
Altera has been a laggard this year, but patient investors could be in for better times in the long run, as Altera has some promising opportunities ahead of it. The stock is pretty cheap right now when stacked up against its peers and it also pays a dividend, making it an ideal pick for value-seeking long-term investors.

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