Going from Strength to Strength

04/13/2010 1:00 pm EST


Joshua Levine

Editor, ChangeWave Investing and ChangeWave MicroCap Investor

Josh Levine, editor of ChangeWave Investing, says a low-profile chip maker is taking on much bigger rivals and is gaining ground in rapidly growing markets.

For the fourth ChangeWave survey in a row, the semiconductor sector is leading the US economic recovery—the first time one individual sector has done that.

Strength like this should be overweighted in our portfolios, so I'm adding one more [semiconductor] stock, and it's one that's been among the strongest performers in recent quarters.

Atheros Communications (Nasdaq: ATHR) is still a relatively small chip firm, but its management is building a substantial and enduring, broadly diversified, fabless semiconductor company.

In a recent conference presentation, Atheros's management characterized itself as the "Un-Broadcom" semiconductor company. Broadcom (Nasdaq: BRCM) is among the biggest semiconductor companies and it competes with nearly every other major chip firm.

Atheros competes directly with BRCM in several segments in communications and wireless connectivity, and it does this through partnerships with Qualcomm (Nasdaq: QCOM), Infineon, Samsung, and other tech leaders. The message ATHR management always gets from its collaborators is, "If you compete with Broadcom, then you're our friend."

Atheros is not just another single-product semi company that had a lucky streak and is about to blow up. Rather, its management has pursued an aggressive strategy of growth combining multiple acquisitions to build on its position as a pioneer in Wi-Fi.

Broadcom serves some very large markets, and Atheros—about one-sixth [its] size—just needs little chunks of these markets to become very successful.

Atheros is a rare breed. Most small chip firms seem to be content with operating in a narrow market and riding the ups and down of that industry's boom and bust cycle. But Atheros's intent is to grow and keep on growing.

Building on its industry-leading Wi-Fi engineering work force, the company has expanded Wi-Fi into handsets and consumer devices (handheld gaming, cameras, TV). Atheros is also enjoying the strength in PCs, which represents 35% to 40% of this business.

Atheros has also diversified into Ethernet and GPS technologies, which are gaining traction, while Bluetooth is also a driver this year. Most recently, ATHR acquired Intellon, whose HomePlug technology uses chips that send data between electronics with a power cord and existing household electrical wires—with no need to add new wires.

The company plans to integrate this powerline communications technology (PLC) with Atheros's other chips to provide three ways to connect and share data throughout a home. PLC will help fill the spots where Wi-Fi coverage is weak or control electronic energy meters that are part of smart-grid deployments.

In [2009’s fourth quarter,] profit soared 265% to 62 cents a share, beating [analysts’ projections] by nine cents. Revenue rose 89% to $186 million. Atheros reports first- quarter 2010 results on April 23rd.

That's the kind of growth that will keep ATHR shares on pace for further gains. Begin accumulating Atheros Communications below a Buy Under of $39, and buy aggressively below $35. (On Monday, the stock closed just above $39—Editor.)

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