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Time to Touch Atmel

NEW YORK ( TheStreet) -- With mixed earnings results coming out from Cypress Semiconductor (CY - Get Report) and Intel (INTC - Get Report), early indicators don't support an imminent rebound in the chip stocks. With the environment still rigged with low average-selling-prices (ASP) and fears of high-end device saturation, it's time to think differently. And Atmel (ATML - Get Report) is in the right place.

Atmel may not carry Qualcomm's (QCOM) muscle in the realm of wireless devices, but this company is quickly building itself into an industry leader in touch controllers and sensors. Given the stock's tight $8-dollar trading range, the Street seems unconvinced Atmel can break free from its dance of once-step forward and two steps back.

For instance, although Atmel's absolute numbers have met their targets, they've fallen short on the excitement scale. Plus, for every socket placement Atmel wins devices, the company has lost other bids due to high-end pricing. Management understands it has superior technology to rivals like Cypress and Synaptics (SYNA). So Atmel prices them accordingly.

The problem, though, is that mobile devices have become commoditized. And with device manufacturers looking to grow margin as they battle low ASPs, they have no problem assigning sockets to the lowest bidder. Atmel's revenue growth has suffered as a result. On the flipside, management's decision to focus on higher-margin businesses has boosted profits. It's the same strategy used by Texas Instruments (TXN).

The question, though, is to what extent management is willing to bend to grow revenue? The Street wants to see more competitive leverage before it believes in this business. Atmel will report fourth-quarter and full-year earnings on Wednesday. Management will try to touch the root of the Street's pessimism. And if they can show better operating leverage, this stock can -- once and for all -- break away free.

The Street will be looking for 11 cents in earnings per share on revenue of $357 million, which would represent year-over-year revenue growth of just 3.6%. While that may be uninspiring, the 11 cents per share suggests year-over-year growth of close to 60%. Again, this goes back to management's focus on higher margins. So despite what the Street may want to believe, there's more to this story than top-line flair.

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