We recently upgraded our recommendation on Altera Corp (ALTR) to Outperform from Neutral.
We view Altera as a play on the secular trend of programmable logic devices (PLDs) replacing application-specific integrated circuit (ASIC), which provides a strong opportunity for future growth. Altera continues to post solid growth and we believe this growth will be sustainable in the long run.
The industry-leading 40-nanometer product execution and the company’s ongoing efforts to improve operating efficiency remain the keys to long-term revenue growth. Management stated that design wins in 40-nanometer are well ahead of any previous generation products.
We believe the company gained market share in 2010 vis-à-vis its rival Xilinx Inc (XLNX). We believe Altera’s lead at the 40 nm technology node could eat into rival Xilinx Inc's market share. in the coming years, Altera has a pipeline of 28 nanometer products, which it believes will maintain the growth momentum in the upcoming quarters.
Moreover, the Stratix and Cyclone families (new generation products) generate higher margins than older product lines. Altera’s profitability should improve as these products make a larger contribution to the sales mix.
Management recently reiterated its guidance for the second quarter. The company now targets a long-term gross margin of 67%, up from the previous estimate of 65%. Consequently, Altera targets a long-term operating margin of 38%.
As expected, Altera faced minor inventory adjustment and a temporary slowdown in the wireless segment in the first quarter. However, results topped our expectations. Earnings estimates for 2011 increased by $0.09 after the company topped earnings in the first quarter.
We find the stock attractive at current levels and hence upgrade our recommendation to Outperform from Neutral. Our Outperform recommendation is supported by a Zacks #1 Rank, which translates into a short-term rating of Strong Buy.
ALTERA CORP (ALTR): Free Stock Analysis Report
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