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) is in the right place.
Atmel may not carry Qualcomm's (QCOM - Get Report) 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 - Get Report). 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 - Get Report).
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.
But don't be surprised if Atmel's revenue comes higher than expected. The company's latest maXTouch solution has picked up new design wins and continues to gain momentum in "non-traditional" touch devices and products. These include things like automotive applications. And when you consider the better-than-expected acceptance of Atmel's new XSense technology, the company is on the verge of a breakthrough in growth.
Although "touch" is no longer a novelty, the Street shouldn't discount the high performance and flexibility of Xsense. It takes touch a step further by enabling new product design possibilities. The other thing is, Atmel's roll-to-roll metal mesh technology offer features that are not yet common in today's touch-enabled products. What this means is that, companies looking for a competitive edge with new concepts have no choice but to look at Atmel.
All of that said, I'm not suggest Atmel is the next Qualcomm. It doesn't have to be, though. It's not yet apparent to the Street, but the growth prospects of Atmel's microcontroller business are, in fact, much improved. And given, the chronically low ASP environment, I don't believe Atmel's management has gotten the credit it deserves for consistently growing profits.
To that end, the growth opportunities in Atmel are still hard too hard to ignore. And I believe $10 per share seems a realistic fair value target over the next 6 to 12 months on the basis of long-term cash flow growth and a recovery in ASPs.
At the time of publication, the author held no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.