The Long Case For Altera Corporation

| About: Intel Corporation (INTC)
This article is now exclusive for PRO subscribers.

Elevator Pitch

I value several factors before buying a stock. These factors include but are not limited to intrinsic value of stock, understandable business with high potential for growth as well as management's ability to steer business in the right direction. Altera (NASDAQ:ALTR) has all of these factors.

Company Description

Altera Corporation, "the Programmable Solutions Company," is a world leader in programmable logic devices (PLDs). Altera PLDs are standard integrated circuits that allow customers to program and personalize the application of the chip to provide market differentiation. Altera serves over 12,500 customers in four primary market segments: Telecom and Wireless; Industrial Automation, Military and Auto; Networking, Computer and Storage; and Other.

Thesis & Catalyst For Altera Corporation

In 2012, Altera experienced a decrease in revenue which may be a reason for the market to leave it at the same price as a year ago. By studying information available on Altera, it is clear that it has a good outlook for coming years as the end customers are slowly shifting from ASICs - often referred to as standard cells - and Application-specific standard products ("ASSPs")to PLDs. Altera has estimated that 2012 market for PLDs was approximately $4.5 billion while combined ASIC and ASSP market was approximately $101 billion. Altera believes that from the latter $50 billion could be replaced by PLDs thus representing significant growth potential.

One fact that favors Altera is its growing spending on Research and Development, which has been increasing from $264.6 million in 2010 to $325.7 million in 2011 and then further increased to $360.4 million in 2012.

In 2012, 44% of Altera sales consisted of sales to Telecom & Wireless market. In recent "2013 Global Technology Conference" CEO of Altera said that Altera expects to see a rise in sales in the Telecom & Wireless market which could be a result of continuing implementation of 3G and 4G in China as well as continuing implementation of LTE in Northern America.


Today, June 19, Altera is being traded at $32.93. Last year the price of Altera didn't change much. Exactly year ago Altera was trading at $34.07 and during last year its stock has been fluctuating in the range from $29.59 to $38.80. In my opinion, Altera at this moment is undervalued.

To consider a stock for purchase, I have a requirement that discounted cash flow valuation outcome as well as Graham valuation model outcome has at least 25% margin of safety. First of all I calculated DCF outcome, which proposes that intrinsic value for Altera share is at $67.22 which gives 51% margin of safety. To come up with this result, I discounted estimated future free cash flows with Altera's weighted average cost of capital of 10.01%. Secondly Graham valuation model outcome was calculated using today's Bloomberg US Corporate Bond Index yield of 3.03% and the outcome of Graham valuation model stated that intrinsic value for Altera is at $54.43 which gives 39.5% margin of safety.

Both values propose that Altera intrinsic value is considerably higher, and the stock should cost at least $54.43. This value gives a potential upside move with a potential profit of 65%.

Company Management

Altera's CEO John P. Daan has been with the company since November 2000. In the lead of CEO Altera has increased its revenue from $827.2 million in 2003 to $1,783 million in 2012. In 2003, Altera had $155.1 million net income which grew to $770.7 million in 2011 and $556.8 in 2012. Management of Altera increased net margin from 18.8% in 2003 to 40.1% in 2010 and decreased it to 31.2% in 2012.

Competitive Landscape

Competition between PLD vendors has been tough. Everyone is spending a considerable amount of resources on innovation and rapidly reducing PLD cost structure and power consumption while increasing device speed and density. Altera faces not only other PLD vendors such as Lattice Semiconductor Corporation (NASDAQ:LSCC), Microsemi Corporation (NASDAQ:MSCC) and Xilinx Inc. (NASDAQ:XLNX) as the competitors, but also semiconductor companies such as Broadcom Corporation (BRCM), IBM (NYSE:IBM), Intel Corporation (NASDAQ:INTC) and others.

Altera estimates that in 2012 FPGA sales accounted for 84% of PLDs sales. In the same time, Altera has managed to increase its market share in FPGA market from 33% in 2007 to 39% in 2012.


To sum it up it can be said that Altera looks to be well managed, highly profitable company with a bright outlook in the future. Altera still is undervalued, and my target for it stands at $54.43 which could result in a potential profit of 65%. It is hard to predict the time frame for potential upward movement occurrence. If Altera manages to increase its revenue as well as net profit, the upward move could possibly happen during coming two years.

Sources: Altera Corporation 2012 Annual report; President and CEO of Altera John P. Danne at 2013 Global Technology Conference.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.