Niche Chip Maker Poised to Take Off

09/03/2008 12:00 am EST


Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, says a maker of logic chips is ready to move much higher.

One of the fastest growing businesses within semiconductors has been in programmable logic devices (PLDs)—chips that allow software developers to use inexpensive software tools to quickly develop, simulate, and test their designs. Then, a design can be quickly programmed into the chip and immediately tested in a live circuit.

One of the top companies in this business is San Jose, Calif.-based Altera (Nasdaq: ALTR). One area where PLDs can play an important role is in wireless. As wireless networks evolve from the old analog systems to the 3G networks in place today and 4G networks coming soon, demand for Altera's products should rise as well. Another potentially big area of growth is in base stations for WiMAX networks.

While Altera is focused on ramping up its PLD business, it keeps costs down by not building billion-dollar fabs. Since it does not own its own production facilities, it obtains silicon chips through supply arrangements with other semiconductor manufacturers, mainly Taiwan Semiconductor Manufacturing Co. (NYSE: TSM). This lets the company concentrate its resources on the design process.

The PLD market has been increasingly gaining popularity as a broadband wireless access technology with significant market potential. From 2002 to 2006, the PLD market has expanded at a compounded annual growth rate of approximately 13%. Altera is well positioned to capitalize on it.

While revenues improved, so did gross margin. Altera announced in July that during the second quarter it racked up sales of $359.9 million, up 13 percent from the second quarter of 2007. Net income [rose] 43% [over] the second quarter of 2007. Altera ended the second quarter with $1.2 billion in cash and investments.

Revenues should increase by 8% in 2009, [while] gross margins will remain around 66%. 
Operating margins will remain high, around 30% for 2009, matching the anticipated 2008 percentage. I expect operating earnings of $1.29 a share in 2009, compared to an estimated $1.19 in 2008.

I think that ALTR will be able to keep it up. The company has already made some design wins which should lead to increased sales this year. Altera has also done a good job of taking market share and can continue to do so in higher-volume markets.

Shares of ALTR currently have a price-earnings ratio of about 24x [and a] price-to-earnings-to-growth (PEG) ratio of 1.19. If you apply the company's current P/E of 24 to its 2009 earnings expectation that would give you a price target of $31 per share—an increase of 29%. I recommend buying shares of ALTR at current levels. (It closed above $22 Tuesday—Editor.)

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