Will Microsoft and Cisco Rejuvenate This Tech Stock?

This tech company's growth has flatlined in the last one year, but Microsoft and Cisco could be saviors.

May 18, 2014 at 2:00PM

If you take a look at chipmaker Atmel's (NASDAQ:ATML) performance in the last year, it's been quite underwhelming. The maker of microcontrollers and radio frequency chips has underperformed the NASDAQ Composite as its revenue and net profit have flatlined. Since Atmel manufactures touch controllers for Microsoft (NASDAQ:MSFT) Windows-based devices and Google Android tablets, it doesn't come as a surprise that its one-year performance chart looks like this: 

ATML Chart

Source: ATML data by YCharts

Again, the fact that Atmel trades at an astronomical 121 times last year's earnings doesn't help, either. That's almost seven times the industry average. At that level of valuation, you need to deliver eye-catching growth, and this is where Atmel has been lacking. Touch-enabled Windows devices aren't exactly the next big thing where you can expect growth.

Also, while sales of Android tablets might be picking up, and Atmel counts a key player such as Samsung on its client list, don't forget that touch controllers are nothing but a commodity. The competition in touch controllers is also quite strong, with Synaptics being Samsung's latest poster boy, as it supplied the touch controller and fingerprint sensor for the Galaxy S5. 

A door opens
It looks like all doors are closed for Atmel. In the first quarter, revenue increased just 2% year over year, which is enough to scare away investors, considering the stock's expensive valuation. However, the company is counting on Cisco's (NASDAQ:CSCO) Internet of Things to become a savior going forward. 

Atmel has been claiming that it has "the most complete portfolio of IoT technologies." Now, this is a good thing to have since it looks like the Internet of Things is the next big step in the evolution of the Internet. Cisco believes that the IoT is an opportunity worth $19 trillion by 2020, while IDC puts the estimate at $8.9 trillion. 

Targeting IoT with solid product development
IDC's forecast includes spending on components and processes, and supporting IT and connectivity. Components and connectivity is what Atmel may bring to the table to benefit from this market. Through its SAM D21 Cortex M0+ family of ultra-low-power microcontroller products, Atmel is offering expanded connectivity and communications functionality for Internet of Things applications.

Atmel is of the opinion that its new product family, SmartConnect, will lead to reduced development times for making cost-effective, battery-operated applications in the industrial market. The company is targeting machine-to-machine communication, home and building automation, LED lighting, and smart energy applications. In the consumer segment, Atmel expects its solution to address the needs of wearables and home appliances.

On the back of such product development moves, Atmel might be tapped by Cisco for IoT applications going forward. Cisco offers a Smart+Connected Residential Solution that enables "real estate developers uses the network as a service delivery platform to transform a physical community into a connected community." Moreover, Cisco has already started investing in early stage companies to push the adoption of IoT. Recently, the networking giant invested $150 million in IoT accelerators in areas such as big data and analytics, connected mobility, and storage. 

Hence, as adoption of IoT gains more ground, Atmel's opportunities will grow, and the company should be able to accelerate its revenue.

Will Microsoft chime in with some growth?
As far as the Internet of Things is concerned, things might look up for Atmel going forward. The company believes that it will enjoy strong tailwinds from its Microsoft partnership. According to management, Atmel is Windows 8 and 8.1-certified in nearly 170 tablets, notebooks, and ultrabooks. This is more than any other supplier. Additionally, Atmel is "actively engaged" in more than 280 different Windows programs. 

These numbers look impressive, but sales of Microsoft tablets haven't been quite impressive so far. Microsoft had just 2.1% share of the tablet market in 2013, up from 1% in 2014. Although this was a good improvement, the numbers aren't great. However, Microsoft could change all that if it allows Android apps on its Windows Store, as reported by The Verge. This would help Microsoft to address the shallow app ecosystem that it has, thereby leading to more adoption.

If Microsoft does take this route, it will be great news for Atmel, as higher sales of Windows tablets should lead to higher sales of its touch controllers.

The bottom line
If everything goes in Atmel's favor, it stands to gain a lot from the evolution of the Internet and an increase in sales of Windows tablets. However, 121 times trailing earnings is too much to pay for the stock right now, especially considering that it doesn't pay a dividend.

But then, a forward P/E of just 13 does look eye-catching. The adventurous types might consider initiating a long position in the stock to profit from the different markets that it is expected to benefit from.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of Microsoft. 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.

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