Texas Instruments (NYSE:TXN) isn't the only semiconductor stock to enjoy a good day. Investors are also cheering after programmable-logic manufacturer Altera (NASDAQ:ALTR) announced its first-quarter earnings for fiscal 2007 yesterday. Um... perhaps they saw something I didn't?

Altera's revenues hit the low end of its guidance from the previous quarter, coming in at $305 million. That was up 4% from a year ago, but also a 4% sequential decline. The bottom line showed much better growth, with net income reaching $75 million, or $0.21 per share, compared to $59 million, or $0.16 per share a year ago. Gross margin did fall a bit from the previous year, down to 65.6% from 66.9%.

It looks to me like the more interesting part of the story has to do with inventory. In short: It's up.

Here's the long version. Sequential growth in inventory was nearly 6%, while year-over-year growth was a far worse 25%. Remember that revenues grew by only 4% over the prior year. Management stated during the conference call that it needed Q4's uptick in inventory to meet an expected demand increase during Q2. It did forecast that sales would rise 1%-4% sequentially in Q2. Still, I find management's statement unconvincing, since it didn't bother to build inventory prior to last year's Q2 -- a quarter during which sales rose 14% over Q1. Now Altera needs to build inventory, just to meet a puff of extra demand?

The only positive explanation I can come up with for the inventory increase -- although it's a reach -- stems from management's statement that yields on its products were better than expected. Two cheers for Taiwan Semiconductor (NYSE:TSM), which does most of Altera's manufacturing. If a larger-than-expected fraction of the chips work, more chips will be put on the shelves, and fewer will be thrown into the dumpster out back. Nevertheless, the yield increase was probably relatively small compared to the amount of extra inventory, and I have to believe that management would have pointed to this as the reason for the inventory build.

Time will tell if there's a problem, but I wouldn't buy Altera based on this earnings report.

Further Foolishness:

Fool contributor Dan Bloom owns shares in Taiwan Semiconductor. He welcomes your comments. The Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.