Atmel Is Touching Bottom and Ready to Rebound

NEW YORK ( TheStreet) -- There's no denying that 2012 is a year Atmel ( ATML) wants to forget.

But although the semiconductor giant has lost roughly half of its value over the past three quarters, the company's performance has not been that bad relative to the Street's expectations.

Even though Atmel disappointed investors with its downward guidance in the third quarter, it was in line with projections made by the group's high flyers such as Qualcomm ( QCOM) and Broadcom ( BRCM). So far, it appears investors are now beginning to make this connection. But is it too late?

Since reaching a 52-week low of $4.37 a month ago, Atmel shares have soared 30%. This leads me to believe the stock has touched bottom. As I've noted previously, upon the release of the company's third-quarter results, there's still plenty of growth opportunities.

Again, as evident by the stock's recent movement, the Street agrees. On the other hand, there's a lot that needs to go right for Atmel for that value to be realized. Unfortunately, some of these requirements are outside of the company's control.

For instance, although Atmel's management did what it had to do to get controllers inside both Microsoft's ( MSFT) Surface tablet and Amazon's ( AMZN) Kindle Fire, it doesn't appear as if these devices are flying off store shelves, according to published estimates.

Likewise, even though the Kindle Fire continues to gain traction in the tablet market, Apple's ( AAPL) iPad is still regarded as the standard. Complicating matters further is the strong demand for Apple's new iPad mini. Though it is not yet clear how the lower-end tablet market will be divided when the quarter's results are released, according to current sales data Apple remains the leader in overall sales.

Still, working in Atmel's favor is its technology is far superior to that of its rivals, which is why the company's products tend to cost more. This very fact brings up another concern. Granted, it is a huge benefit to Atmel to have scored wins with Microsoft, Amazon and Samsung but it also presents the risk that at any point these companies might decide to look for cheaper alternatives.

In the meantime, Atmel has the competitive advantage from an up-market standpoint. This is because average selling prices (ASPs) are higher which helps the company's margins. In my opinion, signs of improved profitability are what it's going to take to compel the Street to believe.

In that regard, the company is making some good strides, but it remains a challenge. Though management was able to make the best out of what has been a difficult economic environment, that gross margins shed almost 1% sequentially and 7% year-over year in the third quarter was discouraging.

Having said that, this has been an issue for the entire sector and speaks to the level of competition and margin pressure that exists. From that standpoint, I expect Atmel to differentiate itself from the rest of the pack by growing in areas where the competition can't. Atmel's Xsense touch sensor can become that differentiating product.

Although touch is now everywhere, the high performance and flexibility of Xsense takes it a step further by enabling new design possibilities for products that rely on touch. The company's roll-to-roll metal mesh technology is able to offer features that are not yet common in today's industry-leading products - including those made by Apple.

What's more, as new concepts enter the market, companies that are looking for a competitive edge will need Xsense to offer unique experiences to consumers -- Xsense offers this at a much lower cost. Investors should also find it encouraging that production and commercial shipments of Xsense has already begun and have been delivered to OEMs in October.

Bottom Line

As I've noted, there's a lot that needs to go right for the stock to work in the long term. The Street wants to see margins and revenues heading in the right direction again - this part remains a challenge. The good news is most analysts expect a general recovery in 2013 for the entire sector.

Likewise, investors should be encouraged by Atmel's growth prospects with Xsense. It shows management's commitment to push the capabilities of touch beyond convention. It's also hard to ignore the incredible value the stock still presents at this level.

I have Atmel listed as one of my top turnaround candidates in 2013 and at $5.64 per share, there is a good chance that the stock can double from here. But it's going to take some time, patience and sound execution for that to happen. A "touch" of luck here or there won't hurt either.

At the time of publication the author had a position in AAPL.

This article was written 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.