Touch technology plays to Atmel's strength
Patient investors might benefit from the chip-maker's heavy investment in touch-panel controllers. A beaten-down stock adds to the allure.
By Richard Saintvilus
Anyone who doubts that touch capabilities are here to stay is not paying enough attention to the smartphone and tablet markets. Consumers every day demonstrate through their spending habits that they want more of it.
For this reason, I have been an unabashed cheerleader of semiconductor giant Atmel (ATML). Its portfolio of touch technologies -- in particular, its controllers with touch-focused properties -- have become vital to the rising popularity of mobile devices.
The Silicon Valley company's stock has lost 38% of its value this year, suggesting that investors don't much care about its touch technology.
But a fresh look at the company's third-quarter financial results suggests it just might be time for investors to reconsider Atmel's market position
Though margins were better than expected, Atmel continues to be a challenged on this front: For the third quarter, gross margin registered at 43.1% -- shedding almost 1% sequentially and 7% year over year.
While investors didn't rush to applaud the company for its performance, things could have been much worse. Clearly, Atmel has been hurt by what's been a weak period for the semiconductor sector, which is likely to continue to struggle in the fourth quarter.
Atmel is projecting fourth-quarter revenue of between $328 million and $352 million. That's not entirely optimistic, considering that third-quarter revenue was $361 million. Likewise, margins are expected to come in flat to slightly lower, at around 43%.
Obviously, the company has decided to take a cautious approach with respect to its outlook, which is understandable. But that's where investors have to be willing to look beyond the numbers to fully appreciate the possibilities that lie ahead.
Atmel has remained steadfast in its commitment to push touch capabilities beyond the conventional understanding of the technology. Atmel does not need tech giant Apple (AAPL) in order to thrive in this space, and it is facing competition from the likes of Qualcomm (QCOM) and Texas Instruments (TXN). But touch is here to stay. While smartphones and tablets continue to be the major drivers of the touch market, Atmel is much more than that, and the industrial side of its business continues to be underestimated.
A good portion of the company's microcontroller revenue already comes from "non-tech" areas such as motors -- devices that operate things we take for granted within the automobile such as closing windows or locking doors.
Another area where the company is likely to generate future growth is in capacitive touch, where home appliances will soon begin to incorporate touch functionality. These include refrigerators and washers and dryers. This is on top of the company's pursuit of business in the aerospace and defense markets.
These initiatives continue to set Atmel apart from many rivals that continue to enjoy the lion's share of Wall Street's attention.
The company's maXTouch controller has recently been selected for use in Samsung's Galaxy SIII mini as well as in Microsoft (MSFT) Surface tablet. (Microsoft publishes MSN Money.) Likewise, maXTouch powers several Google (GOOG) Android devices, including Amazon's (AMZN) Kindle Fire HD. It also powers Parrot's Asteroid in-car entertainment system.
I think in the coming quarters investors should be excited about the potential growth impact of Microsoft's Windows 8 operating system and the new partnership with Samsung.
On the other hand, the company's design wins help offset some of these fears. Investors want to see that more phone designers embrace the touch controller as a central component to the devices.
Though the recent design wins would suggest a level of respect that phone manufactures have for Atmel's technology, Atmel is not the cheapest supplier, either. Price might eventually become an issue. And how that plays into Atmel's margins is something that rightfully weighs on investors.
Still, Atmel's microcontroller business represents more than 60% of its revenue and has expanded for two consecutive quarters, suggesting that the company might be in the early stages of a turnaround. Investors have to appreciate that it's going to take time as the company positions itself for future growth.
There's a lot to like with Atmel as a company and as a stock. For the stock to truly work, Atmel must figure out how to get revenue and margins heading in the right direction again. With the stock looking incredibly cheap, investors might well consider buying in to the company's potential to tap into the growing demand for touchscreen technology. For patient investors, this is an investment that I think will pay off.
At the time of publication, Richard Saintvilus did not own or control shares of any company mentioned in this post.
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