The Touch of Atmel Should Thrill Investors

NEW YORK (TheStreet) -- Anyone that doubts that touch capabilities are here to stay is not paying enough attention to the smartphone and tablet markets. Consumers demonstrate everyday with their spending habits that they want more of it.

For this reason, I have been an unabashed cheerleader of semiconductor giant Atmel ( ATML). Its touch technology and, in particular, its controllers have become vital to the rising popularity of these mobile devices.

On the other hand, that the company's stock has lost 40% of its value so far this year suggests that investors don't care. On the heels of the third quarter earnings report, a closer look reveals that it just might be time for them to reconsider Atmel's market position

Not a Great Q3, but Far From Terrible

For the third quarter, Atmel reported revenue of $361 million, which represented declines of 2% sequentially and 25% year-over-year. Net income arrived at $21.6 million, or 5 cents per share. While that figure shows a considerable decline year-over-year, net income from Q3 2011 included a gain of $33 million from the sale of the company's former corporate headquarters. Nonetheless, the company still beat street EPS estimates by a penny.

Though margins arrived better than expected, it continues to be a challenge for the company. For the third quarter, gross margin registered at 43.1% -- shedding almost 1% sequentially and 7% year-over year. Investors didn't rush to applaud the company for its performance, but things could have been much worse.

Clearly Atmel's Q3 results were adversely impacted by what has been a weak period for the overall semiconductor industry. Q4 doesn't look too promising either.

Atmel is projecting revenue of $328 million to $352 million for the fourth quarter. Not entirely optimistic, considering Q3 revenue arrived at $361 million. Likewise, margins are expected to come in slightly lower to flat at 43%. Obviously, the company has decided to take a cautious approach with respect to outlook, which is understandable. But that's where investors have to be willing to look beyond the numbers to fully appreciate the possibilities that lie ahead.

Moving Forward

In a recent article, I talked about how Atmel does not need tech giant Apple ( AAPL) in order to survive. Although competition continues to ramp up from the likes of Qualcomm ( QCOM) and Texas Instruments ( TXN), Atmel has remained steadfast in its commitment to pushing forward the capabilities of touch beyond conventional understanding.

As I noted in my opening, touch is here to stay. While smartphones and tablets continue to be the major drivers of the touch market, Atmel is much more than that as the industrial side of its business continues to be underestimated. A good portion of the company's microcontroller revenue actually comes from "non-tech" areas such as motors -- devices that operate things we take for granted within the automobile such as rolling up your window or just locking your doors.

Similarly, another area where the company is likely to generate future growth is in capacitive touch where home appliances will soon begin to migrate toward more touch functionality. These include washer, dryers, refrigerators etc. This is on top of the company's pursuit of markets such as aerospace and defense.

These initiatives continue to set Atmel apart from many rivals that continue to enjoy the lion share of market attention. But that is not because Atmel forgets from where its bread and butter comes.

The company's maXTouch controller recently earned design wins in Samsung's Galaxy SIII Mini as well as having been selected by Microsoft ( MSFT) to power its Surface tablet. Likewise, maXTouch powers several Google ( GOOG) Android devices including Amazon's ( AMZN) Kindle Fire HD. It also powers Parrot's Asteroid in-car entertainment system as Atmel continues to expand further inside the automobile.

Can The Company Grow Amid Competitive Pressures?

Making an investment in Atmel today necessitates not only answering this question, but doing so with conviction. Understandably, investors have some doubts as to whether or not the company can withstand competitive pressures -- particularly as revenues and margins continue to decline.

Aside from the prominent rivals such as TI and Broadcom ( BRCM), there is also Cypress ( CY) and Maxim ( MXIM), which continue to make meaningful strides.

On the other hand, the company's considerable number of design wins helps offset some of these fears. Investors want to see that more phone designers embrace the touch controller as a central component to the devices.

Though the design wins would suggest the level of respect that phone manufactures have for Atmel's technology, Atmel is not the cheapest supplier either. Price might eventually become an issue. And how that plays into Atmel's margins going forward is something that weighs on the mind of investors.

Still, Atmel's microcontroller business represents over 60% of the company's revenue and grew for two consecutive quarters, suggesting Atmel just might be in the early stages of a turnaround. But investors have to appreciate that it's going to take some time as the company is repositioning its business for future growth.

I think in the coming quarters, investors should also be excited about the potential growth impact of Windows 8 and new partnerships with Samsung.

Bottom Line

There's a lot to like with Atmel today as a company and a stock. What stood out from the company's third-quarter earnings report was that management continues to make the best out of what has been a very difficult situation for the entire sector. That said, for the stock to truly work, Atmel must figure out a way to get revenue and margins heading again in the right direction.

Nonetheless, at current levels the stock still looks incredibly cheap. As noted, the shares have lost 40% of its value so far this year, flipping the risk/reward ratio to the side of the reward.

At $4.89 and price-to-earnings ratio of 10, growth investors looking for a solid turnaround play should really consider Atmel. Growth to $10 in 2013 is not out of the question. Atmel has invested heavily into its touch business and I think for patient investors this is an investment that will eventually pay off.

At the time of publication, the author held no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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