On Apr 11, 2014, we issued an updated research report on Altera Corp. (ALTR). We remain encouraged by the company’s field-programmable gate array (FPGA) offerings. FPGAs are widely used in third generation (3G) and fourth generation long-term evolution (4G LTE) network connections. Higher content of FPGA per base station allows higher data bandwidth.
Notably, China’s ramp up of LTE deployments should translate into revenue growth for the company (LTE base stations generally use more FPGAs). Altera already has a strong presence in China by virtue of its partnership with Huawei.
Moreover, the association with Intel (INTC) to manufacture advanced multi-die devices will positively impact the company. Intel will be making chips for Altera using its 14-nm Tri-Gate Transistor technology. Altera is currently manufacturing its chips using the 45-nm, 40-nm and 28-nm nodes. Intel’s technology will help it to make a smooth transition to 14-nm FPGA production.
However, Altera’s 28-nm business has not done as well as expected, while its closest competitor Xilinx (XLNX) grew at a brisk pace. Therefore, it appears that the company is losing market share. The trend could continue in the coming quarters as Xilinx expects a positive growth while Altera expects its revenues from 28-nm to decline.
Additionally, Altera operates in the semiconductor industry, which is highly cyclical and volatile. Over time, the semiconductor industry has experienced economic downturns and business contractions, which have a severe and prolonged adverse impact on businesses.
Last but not the least, another inherent challenge in the logic business is related to the longer sales cycle. After the selection of the IC, customers may take two or more years to design a system, build prototypes, market sample products for customer adoption and make necessary modifications in the system.
After the final system design is approved, the customer places purchase orders with logic device manufacturers such as Altera and volume production begins. The longer sales cycle stretches out the time for revenue recognition.
Currently, Altera has a Zacks Rank #3 (Hold). In the meantime, however, investors may look at Hewlett-Packard (HPQ) which sports a Zacks Rank #2 (Buy).
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