Atmel: Growing Into Its Valuation And Heading To $15

| About: Atmel Corporation (ATML)

For investors who are tired of hearing from analysts about how overvalued stocks are and for companies who cringe each time they hear it, the best way to prove the naysayers wrong is for the companies themselves to deliver better-than-expected performances and grow into that valuation. This (of course) is easier said than done, because if it were the term overvalued would not exist on Wall Street and for that matter, nor would any bears.

This is where chip maker Atmel (NASDAQ:ATML) finds itself, in a never-ending cycle of having to prove that it deserves its valuation - and then some.

Growing Into its Valuation

The reality is Atmel has been and will continue to be a great name in the semiconductor space for quite some time and as Apple (NASDAQ:AAPL) and other smart phone/device manufacturers continue to produce the types of products that consumers can't live without, Atmel is well positioned for this robust growth - one that has yet to truly reach its peak. But the company is not without its headwind or more specifically, stiff competition from the likes of ARM Holdings (NASDAQ:ARMH) and Texas Instruments (NYSE:TXN) that are vying for the same market.

For Atmel, what continues to stand out is that the company's products include microcontrollers, programmable logic devices and a wide range of proprietary system-on-chips and non-volatile memory chips. The company manufactured about 93% of its own chips in 2007. It sells products into many different end markets, including communications, consumer electronics, computing and automotive. Granted, as has been the case for most tech companies, it has had its own fundamental challenges at the onset of the recession. But not all companies succeed in self-improvement to the extent that Atmel has.

The company is a good example of the rewards that can come when patient shareholders and committed management intersect. From a fundamental standpoint, one can argue that it has outpaced its peers over the past several quarters - even giant Intel (NASDAQ:INTC). Plus there is some speculation that the company will be releasing details of new leading-edge products and potential new business partnerships to go along with contract extensions and reports of existing technology improvements at some point during the year. For these reasons, I continue to think that the company will grow into its valuation.

The Quarter That Was

In its recent quarter, the company all but affirmed my long thesis by meeting or exceeding expectations on several of its key metrics. Atmel reported full year 2011 revenue that arrived at $1.8 billion compared to a $1.64 billion for 2010. This figure represented a 10% increase over the prior year. Actually full year revenue would have increased by 15% when excluding the smart card divestiture, which occurred during the first quarter of 2010. In the fourth quarter, gross margin arrived at 48.1% - slightly above the midpoint of the company's guidance of 48%.

It also reported non-GAAP gross margin of 48.7%. The sequential decrease in gross margin was due primarily to lower factory utilization as a result of decreased revenues due to the downturn. Despite this softness in the semi cycle, the company said its fab-lite operating model showed much better performance when compared to past downturns - particularly in the periods of 2009 where it reached the low 30% level. Overall, for full year 2011, gross margin of 50.4% represented a record for the company and was a significant improvement from the 2010 gross margin of 44.3%.


What is not to like? This stellar report trumps any disappointment that arrive as a result of its Q3 report which sent the stock downward. For this, much skepticism remains from its somewhat disappointing 2011. But anyone who looks at the company closely enough can see that a turnaround is in full effect. And yet even at its current valuation, it looks like a steal considering it is trading below its book value and its potential to reach $15 by year's end.

Disclosure: I am long ATML, AAPL, TXN.