Altera (NASDAQ:ALTR) recently reported better-than-expected results for the third quarter thanks to improving end-market demand and increasing customer orders, which were the result of inventory restocking. Management also suggested that the worst is over and issued bullish guidance for the fourth quarter. Altera's fourth-quarter revenue guidance calls for revenue to increase 6%-10% over the third quarter. That translates to revenue of $304 million to $315 million, which is above the previous consensus estimate of $292 million.

Investors liked what they heard, and the shares moved 2% higher on the news.

Current reality
Still, the company's actual numbers for the third quarter paint a slightly different picture. Sales were down 20% from the third quarter of 2008, and earnings were down about 40%. There was weakness across the board, with the company's four business segments reporting double-digit sales declines. Management pointed to a slowdown in China's telecom build-out as part of the reason for the year-on-year declines.

The company is encouraging investors to look past the third quarter and focus on a rosier future. Altera is the market leader in complex programmable logic devices and field programmable gate arrays. Its products are used to help build mobile broadband and other communication networks around the globe. Altera's optimism comes from China increasing the amounts it spends on 2G, 3G and backhaul infrastructure in the fourth quarter. The company also expects additional wireless network opportunities in India and Japan in 2010.

Valuing the story
The build-out of wireless infrastructure to support mobile broadband is a potential growth story that could last for another three to five years. Altera is well-positioned to benefit from a growing demand for mobile broadband.

Even so, it is difficult to get too excited about Altera's stock, which is trading at 28 times trailing-12-month earnings per share. The stock doesn't fare much better on a forward P/E basis, trading at 20 times next year's consensus EPS estimate. Here's a glimpse of Altera compared with key competitors and other large chip makers:

Sources: Motley Fool CAPS and Yahoo! Finance..

Where does it stand?
Altera's valuation looks expensive for a company that is clearly benefiting from an inventory correction cycle that may or may not have legs. The time to buy semiconductor stocks is ahead of the inventory correction.

Mobile broadband growth appears promising, but much of that growth is already reflected in Altera's shares.

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