Why Intel Should Buy Atmel

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 |  About: Atmel Corporation (ATML), Includes: INTC
by: Wall Street Playbook

Summary

Given Atmel's lead in areas like touch and the company having expanded its family of low-power ARM Cortex M0+ micro controllers, it will be tough to bet against them.

Atmel has the technology to keep re-inventing the capabilities of touch.

Atmel is a strong bet to reach $10 at some point this year. And I wouldn't be surprised if Intel offers a $12-dollar bid to close this deal.

With downbeat results coming out from several prominent chip names, investors weren't sure of what to expect from Atmel (NASDAQ:ATML). While the broader chip group are still rebounding from an environment riddled with low average-selling-prices (ASP) and high-end device saturation, unlike, say, Broadcom (BRCM), Atmel has always been shielded from those headwinds. With the company's rapid ascent into an industry leader in touch controllers and sensors, investors looking for long-term value in chips should consider this company. And following a stronger-than-expected first quarter, Atmel won't remain cheap for long.

Wednesday, the company reported first-quarter revenue of $337.4 million, which was 2% higher year over year and beating Street estimates by more than 3%. In the year-ago quarter, Atmel posted revenue of $329 million. The increase in revenues was driven by improved performance in microcontroller business and new product introductions, including SmartConnect, which integrates Atmel's ultra-low power microcontrollers and wireless connectivity solutions. This device is expected to further the company's push into the Internet of Things.

The company is also benefiting from strong growth in various geographies, including Asia, which represented 53% of total revenue. The EMEA region (Europe, Middle East and Africa) added 30% of revenues, while the Americas accounted for the remaining 17%.

From an operational perspective, Atmel reported non-GAAP net income (excluding one-time items) of $29.1 million or 7 cents per share. Recall, analysts were projecting adjusted earnings of 6 cents per share. Last year, Atmel earned $13.6 million or 3 cents per share. Essentially, the company was able to more-than double its earnings from last year, which can only be achieved by the combination of lower operating expenses and strong revenues.

This combination helped Atmel achieve a Non-GAAP gross margin of 44.0%, which was 30 basis points higher sequentially and it topped last year's mark by an impressive 3.5%. The company ended the quarter with roughly $46 billion in cash from operations, far-exceeding the $12 million in cash used in operations for the first quarter of 2013.

The company reported a combined cash balance (cash and cash equivalents plus short-term investments) of $255.5 million. While that number reflects a $23.6 million decline sequentially, this is because Atmel used that money to repurchase $55 million worth of its common stock during the first quarter. Following the strong performance, CEO Steve Laub said:

"Our microcontroller business performed better than seasonal and continues to benefit from the investments in new product introductions including devices related to the Internet of Things which are driving increasing revenue as the number of microcontrollers connected to the Internet grows extensively. We are confident that our ongoing operational initiatives will significantly enhance our profitability throughout the remainder of the year."

These are certainly encouraging words. And given, the chronically low ASP environment, I don't believe Atmel's management, particularly Steve Laub, has gotten the credit they/he deserves for consistently growing the company's profits. And it seems the company's decision to go after higher-margin businesses, given its superior technology, has begun to pay off. Now Atmel is in a race with Intel (NASDAQ:INTC) to see who can dominate the Internet of Things, which has become the new buzzword.

But given Atmel's lead in areas like touch and the company having expanded its family of low-power ARM Cortex M0+ micro controllers, it will be tough to bet against them. These products offer strong features like innovative event system and support for capacitive touch button, slider and wheel user interfaces, and so on. Although "touch" is no longer a novelty, Atmel has the technology to keep re-inventing the capabilities of touch.

And from my vantage point, this makes Atmel a strong acquisition candidate for Intel. Atmel's growth opportunities are too hard for Intel to ignore. For that matter, investors should take notice. With the stock trading at around $7.80 per share, Atmel is a strong bet to reach $10 at some point this year. And I wouldn't be surprised if Intel offers a $12-dollar bid to close this deal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.