Intense competition in the semiconductor industry has led investors to value stocks in this space on very low multiples. Even international growth and solid balance sheets have not helped most of these stocks to regain their worth. The following stocks show both sides of the picture:
Advanced Micro Devices, Inc. (NYSE:AMD)
With the completion of the Global Foundries deconsolidation (Mar-2010) and the settlement with Intel (Nov-09) to resolve all outstanding licensing disputes, AMD completed its transformation to a fabless design company.
(Fabless manufacturing is the design and sale of hardware devices and semiconductor chips while outsourcing the fabrication or “fab” of the devices to a specialized manufacturer called a semiconductor foundry).
The cash infusion from the two transactions combined with debt repurchases have strengthened AMD’s balance sheet to a net debt position of $0.4 billion now vs. $4.0 billion in 4Q08. Despite a much improved balance sheet (i.e. significantly less solvency risk), AMD trades at 0.57x NTM (Next twelve month) sales, a 46% discount to historic average, a 71% discount to the SOX (Philadelphia Semiconductor Index) vs. historic discount of 51%, and a 68% discount to the SPX vs. historic discount of 42%.
While the valuation is attractive, the Street remains neutral on the stock given concerns around AMD’s:
(1) continued manufacturing issues at Global Foundries,
(2) weak competitive position in severs vs. Intel’s Romley,
(3) weak competitive position in ultra-mobility vis-à-vis Intel’s Atom and ARM solutions and
(4) lack of clarity around the new management’s strategy/direction.
Altera Corporation (NASDAQ:ALTR).
Altera is well-positioned in the telecom infrastructure market (makes 45% of its revenue from telecom segment) to gain from both emerging market 3G (2x the content of 2G) and the LTE/4G developed market (3x the content of 2G) build-outs. While the ramp of 40nm (nanometer) is still expected to benefit Altera (~31% of revs) in CY13, a rapid ramp of 28nm to 5-7% is expected of CY13 revenue to favor competitor Xilinx, Inc. (NASDAQ:XLNX) . Given this competition, investors often tend to compare Altera Corporation (NASDAQ:ALTR) with Xilinx.