Altera Versus Xilinx, The Battle for Specialized Semiconductor Supremacy
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For the past decade or so, active traders have dabbled in combinations of semiconductor companies Altera Corp. ) and Xilinx Inc. ); sometimes on the long side, sometimes on the short side and sometimes as a market-neutral pair. Throughout that period, the factors that have driven the performance of one stock have been influential in driving the price of the other. Furthermore, in many cases, the universe of comps have also included NVIDIA Corp. ), Maxim Integrated Products ) and Linear Technology Corp. ). While there are import differentiators in the group, these five names lend themselves especially well to, not only comparison, but to building portfolios that combine all five in various ways. For the discussion at hand, however, the focus will remain on the relative attractiveness of the initial two.
Recent News Events
Both Altera and Xilinx have made headlines within the past few weeks. Altera announced a licensing deal with IC Manage, Inc., to help the company streamline its design management services. Altera will begin using several of the company’s tools – including its IP Central Solutions and its Global Design Platform – it an effort to improve efficiency and quality. The improvements to Altera’s workflow will be largely accomplished by eliminating redundancy and ensuring the various locations communicate appropriately. While the financial specifics of the deal were not disclosed, the agreement is believed to span several years.
Xilinx has likewise been in the news, having recently announced its acquisition of PetaLogix, an embedded Linux solutions provider. The move is an attempt by Xilinx to more firmly establish itself in the vertical market; this augmented strength is expected to improve the company’s overall position within the embedded market. By providing customers with direct and modified Linux solutions, the company can become a stronger player within the space. The specific terms of this agreement were not disclosed.
By the Numbers
Looking at the major financial metrics for each of these stocks reveals a mixed picture as well. On a valuation basis, Altera has a trailing twelve month P/E of 19.5 relative to 18 for Xilinx; amongst the other competitors, NVIDIA is the cheapest priced with a P/E of 18.5. The growth statistics do little to clarify the picture as Altera had year-over-year quarterly revenue growth of -15% relative to a decline of only 5% for Xilinx; only NVIDIA was able to grow revenue, increasing this figure by 3%.
When considering the operating efficiency of these companies, there is also little clarity. Altera has an operating margin of 35% relative to 28% for Xilinx; the industry-leader is LLTC with an operating margin of 46%. Where LLTC stumbles is in its forward-looking growth projections. When this is combined with the company’s P/E, one gets a PEG ratio near 30 – not the type of growth multiple one would like to see in a technology company. On efficiency, Altera scores near the top of the pack and should only increase this figure in light of its new partnership.
Looking to the chart below, one of the influences on some of these statistics is the relative performance of each. Where NVIDIA and LLTC have been the strongest performers over the last three months, Maxim and Xilinx have been the weakest. Given the tight bunching of this group, it is easy to see why active traders like to trade them in different combinations. While the outperformers and the laggards differ in different periods, the group tends to be closely tied.
Trading the News
Given the close relationship that exists between all five companies, it is natural to wonder why Altera and Xilinx have been selected for consideration. While neither of the news items discussed above is explosive, each should be seen as a potential catalyst for its respective stock. Additionally, where Maxim and LLTC have been well-insulated from the recent patent litigation, NVIDIA is heavily involved in the smartphone and tablet markets. Ultimately, Altera and Xilinx appear to be the cleanest comps and, therefore, at current levels they make the players that can be best evaluated on a relative basis.
Given the thin margins of differentiation between the two stocks, there are two factors that make Altera preferable at current levels. First, with a stronger operating margin, Altera should be better positioned to take advantage of those opportunities that emerge to drive its business. Second, given the outperformance of Xilinx over the past three months, buying the laggard as this price relationship “normalizes” should be rewarding. Overall, the group looks strong for the rest of the year, particularly into a meaningful economic recovery. Between Altera and Xilink, Altera looks like the better bet.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Linear Technology and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.