We recently downgraded our recommendation on Altera Corporation (ALTR), a leading supplier of programmable semiconductors and related products. Altera designs, manufactures and markets a broad range of high-performance, high-density programmable logic devices (PLDs) such as field-programmable gate arrays (FPGAs) and complex programmable logic devices (CPLDs).
Altera recently upgraded its guidance for the third quarter of 2010. Altera now expects revenues to grow 10 – 14% sequentially, up from the prior guidance range of 4 – 8%. The new guidance implies revenues between $516.2 million and $535.0 million, compared with the earlier guidance of $488.0 – $506.8 million.
The upgrade in guidance was driven by broad-based growth across all the four vertical markets that the company serves: 1) Telecom & Wireless, 2) Industrial Automation, Military & Auto, 3) Networking, Computer & Storage and 4) Others.
Altera and rival Xilinx, Inc (XLNX) have a duopoly in the PLD market. Altera continues to benefit from the growth in 65-nm and 40-nm FPGAs as customer designs move from prototyping to production.
The company seems to have gained market share as rival Xilinx continues to be plagued by supply constraints in its Virtex 6 (40nm) products. Altera also has a pipeline of 28 nanometer products, which it believes will maintain the growth momentum in the upcoming quarters.
However, there seems to be an inventory build-up in the semiconductor supply chain. This should lead to a slowdown in orders in the coming quarter and thereafter. Moreover, the 3G roll-out in China is progressing slower than expected. We remain cautious about an inventory-correction in the industry.
The recent upgrade in guidance by management has led to an upward revision in estimates. The current Zacks Consensus Estimate for 2010 is $2.36, up $0.08 in the last thirty days and up by $0.01 in the last seven days.
However, the Zacks Consensus Estimate for 2011 decreased by $0.02 to $2.32 in the last seven days, signaling a slowdown in growth in 2011. Margins have already peaked in recent times and are not likely to sustain in the long run.
We believe that most of the positives attached to the stock are already discounted at current levels and see limited upside going forward. We expect a decline in growth in the coming quarters due to the current inventory build-up at most major customers leading to a slowdown in orders. Hence, we downgrade our recommendation to Neutral from Outperform.
Our Neutral recommendation is supported by a Zacks #3 Rank, which translates into a short-term rating of Hold.