Investors Have Faith in This Chip Company, So Should You

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The signs of a turnaround in Atmel’s (NASDAQ: ATML) business were quite evident, but even then, one wouldn’t have expected the stock to appreciate over 40% in the past three months. The company was in dire straits last year as revenue declined and margins contracted, which makes the rally a bit surprising. Hence, a sharp snapback was on the cards after Atmel disappointed investors with a lowly outlook for the first-quarter of fiscal 2013.

Going down

Also, Atmel’s performance in the previous quarter wasn’t noteworthy either. Although revenue was slightly better than estimates, it was 10% lower than the prior-year quarter. Non-GAAP gross margin dropped from 48.7% last year to 41.6% in the quarter and adjusted earnings fell almost 57%. Moreover, expected revenue of $311 million to $328 million for the current quarter is some way off the $332.8 million consensus.

Thus, a fascinating rally came to an end for Atmel investors. Still, Canaccord Genuity analyst Bobby Burleson is of the opinion that Atmel’s business has reached its cyclical bottom and the company would do better later this year, driven by increased demand for its touchscreen microcontrollers.

But back with a bang

But, a day later, Atmel’s rally was back on track as the stock gained close to 7% on the back of optimism about its business and prospects. Atmel’s microcontroller business has exhibited solid growth in the last one year and it is expected to get better, driven by the growing number of touch based devices.

Atmel sees touchscreen laptops and notebooks on Microsoft’s (NASDAQ: MSFT) Windows 8 as a huge opportunity. Touch devices are a vital cog in Microsoft’s strategy of pushing sales of Windows 8 as the software giant looks to fight against MacBooks, iPads and tablets running Android. And Atmel is at the center of Microsoft’s Windows 8 touch strategy.

It supplied the controller for the Surface tablet, and has been certified for Windows 8 by 40 different Ultrabooks and tablets. The company has landed design wins at computer makers such as ASUS, Dell, Hewlett-Packard, Lenovo, Samsung etc. Atmel is a part of more than fifty Windows 8 programs. It has reference designs covering the entire spectrum of Windows 8, partnering with companies such as Intel, NVIDIA and Qualcomm.

Playing on another front

Windows 8 is Atmel’s primary growth driver, but it has made some friends at the other end of the spectrum as well. The company landed a vital spot in Amazon.com’s (NASDAQ: AMZN) 7-inch Kindle Fire HD tablet, which was the most gifted item of the holiday season on the online retailer’s website. Also, reports suggest that the tablet has kept its strong sales momentum intact this year as well, which is great news for Atmel since it indicates a fruitful partnership with the ecommerce giant.    

In addition, Atmel also provides the controller for the acclaimed Google (NASDAQ: GOOG) Nexus 10 tablet. The potent Google-Samsung partnership, along with Amazon, is driving market share of Android tablets north, and this bodes well for Atmel since it doesn’t have the backing of the Apple (NASDAQ: AAPL) iPads to drive sales.

Google’s Android operating system took market share away from Apple in the previous quarter, as the Cupertino-based giant saw its share drop from around 52% in Q4 of 2011 to 43.6% in the previous quarter. There are concerns that the iPad mini might be cannibalizing its bigger brother, but impressive growth of Samsung, Amazon and Asus might create further pressure even though the iPad is the tablet of choice. Thus, being in the Android camp in the war of operating systems seems to be finally reaping results for Atmel after disappointments in the past.

Atmel has also trained its sights on the fast growing smartphone market in China. Its maXTouch controllers have landed design wins at Samsung, Meizu, Xiaomi and others, which are among the popular phones in the country.

Final words

It is this positivity which has been driving Atmel’s shares up. Both investors and management expect Atmel to do well on the back of its broad product portfolio and partnerships with the best names in the mobile devices industry.

The rise in the prominence of Android tablets and touch-based computing devices are probable tailwinds and this can’t be denied. In addition, the company also expects growth from automotive and Wi-Fi connectivity. It’s acquisition of Ozmo, a maker of ultra-low power Wi-Fi solutions, certainly adds to Atmel’s portfolio and should reap dividends going forward.

Hence, if a sordid outlook for the current quarter isn’t much of a problem, then investors should take a look at this chip company since it can deliver the goods in the long run.


TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Google. The Motley Fool owns shares of Amazon.com, Apple, Google, and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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