Programmable logic devices maker Altera (NASDAQ: ALTR) has hit a windfall in terms of innovation. It's extended its agreement with foundry partner Intel (INTC +1.07%) to make multi-die devices that combine several components into a single package. Last year, the two companies entered into an agreement under which Intel decided to manufacture Altera's field programmable gate arrays (FPGAs) using its 14-nanometer FinFET process technology.
Going one step further
Now, Intel will use its technology to integrate separate components such as processors, memory, and programmable chips to make Altera's FPGAs. As a result, Altera's programmable chips will now become more efficient and cost effective. Using multi-die packaging, Altera will now be able to provide customers with a single solution consisting of separately made components, reducing energy consumption and shrinking the size of the chips.
Intel has been trying hard to explore new areas for growth, and this deal reflects the progress that the chip giant is making. Intel is giving chipmakers access to its manufacturing expertise in an effort to keep production at its factories at optimum levels. The partnership with Altera has risen out of this necessity and Intel is looking to add more customers going forward. Thus, this is a win-win situation for both companies.
The opportunity
Driven by this partnership, Altera hopes to capture half of the FPGA market in the next five years. The global FPGA market is expected to be worth $8.95 billion by 2019, according to Transparency Market Research. Given that Altera's total revenue in the previous fiscal year was just $1.73 billion, the company can capitalize if it is able to execute properly and deliver in the long run.
Altera's product development is already reaping results. Its revenue from new products is growing at a solid rate and accounted for 43% of total revenue last fiscal year. More specifically, Altera's 28-nm and 40-nm products were the primary drivers behind this growth, and once the 14-nm solutions come into play, then the growth rate should get even better.
Altera's growth is also being driven by the TD-LTE build-out in China. The deployment of radios and base stations By China Mobile (CHL +0.00%) is leading to strong demand for Altera's chips with the prospects looking even stronger going forward. China Mobile now plans to deploy 500,000 by the end of 2014, way higher than its earlier plan of 200,000 base stations. But the most important part is that Altera sees a multi-year deployment cycle in the Middle Kingdom as China Mobile strengthens the network and expands it to more areas.
Going forward, Altera expects LTE opportunities in the United States to pick up as well, driven by Sprint and T-Mobile, while AT&T and Verizon's small-cell deployment would be yet another catalyst.
Taking a fundamental view
Altera's strong prospects are complemented by its attractive valuation. The company trades at a trailing earnings multiple of 25, which is almost at par with rival Xilinx. On a forward earnings basis, Altera trumps Xilinx with a multiple of 19 as compared to Xilinx's 21. In addition, Altera's balance sheet also looks relatively strong, with a solid current ratio of 5.5, total cash of $3 billion, and a debt of $1.5 billion.
Also, the company sports a dividend yield of 1.70% at a payout ratio of just 37%. At the same time, Altera returns cash to shareholders through share repurchases. In the last quarter, the company had bought back 4.4 million shares, and has a pending repurchase authorization of 36.8 million shares.
The takeaway
All in all, Altera looks like a pretty strong package from an investment point of view. The company's focus on bringing out cutting-edge products, along with bright prospects in the FPGA market and the rollout of LTE should lead to a robust performance in the long run.
