Semiconductor companies engaged in manufacturing programmable chips, such as Xilinx (XLNX) and Lattice Semiconductor, have done decently this year. However, Altera (NASDAQ: ALTR) has lagged behind its peers by quite some distance. Its revenue has been declining and share price appreciation has been the worst of the three as witnessed below.
ALTR Revenue TTM data by YCharts
Because they are in the same industry, the three companies are bound to get into each others' way and it seems like Altera has suffered as a result. According to JPMorgan (via Barron's), stiff competition from Xilinx and a change in customer preferences has troubled Altera.
Turnaround in sight?
However, Altera did provide a few positive takeaways when it reported its second-quarter results in July. The company is focused on controlling costs. As a result, it managed to keep its operating expenses at the low end of its guidance range at $174 million. Also, Altera reduced its operating expense forecast for the current fiscal year by $14 million.
In addition, Altera saw better order rates in the previous quarter. Its book-to-bill ratio was above 1, which means that it received more orders than it could have fulfilled. As a result, its backlog strengthened and management guided for a 5% to 9% sequential increase in revenue for the ongoing quarter. Moreover, Altera management stated that they are seeing an increase in lead times, which indicates stronger order patterns.
Product development moves
Altera is also looking to steal market share from its peers by manufacturing its chips using Intel's 14-nanometer process. Earlier this year, Altera agreed to use Intel as its foundry partner to manufacture field-programmable gate array (FPGA) chips using the 14-nanometer technology. Altera management believes that such a move will enable it to capture around half of the industry's revenue in the next five years.
This move might catapult Altera ahead of Xilinx in the future. Xilinx's current family of 28-nanometer, 40-nanometer, and 45-nanometer chips are finding great traction in the market as evidenced by a 75% jump in sales of new products in the previous quarter. The company is also aggressively pushing forward its product development initiatives.
It recently launched a programmable architecture called UltraScale to cater to next-generation smart networking equipment, and believes that this will improve system performance and efficiency by 1.5-2 times. Xilinx also completed the design work of the industry's first 20-nanometer device recently. But, the company still hasn't moved into the 14-nm realm and this is where Altera might come out on top in the future.
Altera is moving into the 20-nm territory and is in the process of finalizing its first product on this platform. The company is also engaging with customers across the wireless, computing, and telecom end markets to push the adoption of its 20-nm family.
Opportunity in China
These product development moves, along with the fact that Altera expects the roll out of 4G in China to push its business higher indicate better times ahead. The ongoing roll out of TD-LTE by China Mobile (CHL) and the expected deployment by China Telecom next year could push Altera's top line higher. China Mobile recently doled out initial contracts worth $3.2 billion as it begins building 207,000 base stations in 31 provinces.
As reported by China Daily, China Mobile might increase its capital expenditure by approximately 50% this year to the tune of $30.5 billion. As the biggest telecom company in the world begins its 4G roll-out and boosts spending, Altera could expect to have a slice of the pie given its 40%-plus exposure to the communications market.
The takeaway
An expected decline in costs, improving order rates, and impressive product development moves make Altera look like a good investment proposition. The company's earnings are expected to grow an impressive 27% in the next fiscal year and it also carries a dividend that yields 1.62%.Keeping these points in mind, investors should considering taking a closer look at Altera as the company seems well-positioned for the future.
