Tuesday, November 13, 2012

Altera: Goldman Adds to Conviction List on Carrier Trends

Shares of programmable chip maker Altera (ALTR) are one of the standout gainers this morning, rising $1.07, or almost 3%, at $39.13, after Goldman Sachs’s James Schneider reiterated a Buy rating on the stock and a $44 price target, and added the shares to Goldman’s “Conviction List,” writing that the company has “strong fundamental drivers through 2012 at a time when expectations for carrier CapEx remain very low.”

For one thing, the whole market for networking equipment, which Altera sells into, will be better by the middle of this year, thinks Schneider, as carriers upgrade their infrastructure after years of underinvestment. That could mean telephone company capital investment could rise 4% this year versus a prior expectations for just 3%.

Schneider saw lots of signs of such intent to spend by carriers at the Mobile World Congress telecom confab in Barcelona, Spain, two weeks ago. That includes “aggressive” deployments of the “long term evolution,” or LTE, cellular data standard in the U.S.

But the other important thing, he thinks, is that the sale of the “programmable logic devices,” or PLDs, that Altera makes, have been 18% below “normalized levels” of late for the entire industry.

Schneider sees a reversion to the mean:

In addition to broad industry weakness, we believe the comms segment in particular is seeing an impact from delays in deployments from service providers, with many carriers choosing to push out deployments previously scheduled for 2H11 into mid-2012. However, following Altera�s 4Q results and 1Q update, we have greater confidence in a reversion back up to trendline levels through 2012.

For Altera specifically, there’s the prospect the company is poised to take market share from competitor Xilinx (XLNX) as more parts made with 40 nanometer technology displace older parts with 150 nanometer features.

While Xilinx is pushing to dominate the next plateau, 28 nanometer, the company’s claims to have some 70% of that life-cycle sewn up seem “overly bullish” to Schneider.

it is still very early in the ramp of the technology, and we believe Altera is well positioned in volume comms products. Regardless of the exact share levels at 28 nm [�] 28 nm will have little impact on overall market share in either 2012 or 2013, since 28 nm sales will likely represent just 1% – 3% of the industry this yea

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