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Investors Focus on Altera's Price, Not Its Report

The chipmaker posted an upside surprise, but it is seen as approaching pricey levels.

Updated from April 28

Shares of


(ALTR) - Get Report

traded down slightly as Wall Street skeptics refused to be swayed by yesterday's better-than-expected first-quarter results, saying the stock looks pricey relative to its short-term growth prospects.

In midafternoon trading, shares were down 32 cents, or 1.9%, to $16.18.

In a morning note, Lehman's Dan Niles said despite Altera's upside surprises on revenues and earnings, the uncertain short-term growth outlook and the stock's relatively steep valuation are reasons to stay on the sidelines.

In the longer term, the company's prospects are more interesting: He notes that both Altera and rival


(XLNX) - Get Report

are taking share from another type of silicon known as application specific integrated circuits, especially in the consumer, auto and industrial end markets. Altera's products, programmable logic devices, are off-the-shelf chips that customers program themselves, allowing for faster time to market.

"Still, visibility is not great so our concerns remain as we are hearing little evidence of pickup in end demand," he writes in a note. Niles has an underweight rating on the stock; Lehman has no banking relationship with the company.

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At Pacific Growth Equities, Jim Liang expressed similar worries on valuation. "We are encouraged to see continued strength in new products at Altera, and believe the company is well positioned to outgrow the semiconductor industry going forward. However, at 46 times our 2003 EPS estimate and 35 times our 2004 EPS estimate, we believe the shares are fully valued. As such, we are maintaining our under weight rating," he writes.

Pacific Growth doesn't do any banking for Altera.

Monday Altera beat expectations while posting sales and earnings above last year's levels. The chipmaker said June quarter sales are expected to show further growth.

First-quarter sales of $195 million were up 13.3% from a year ago and above analysts' expectations for $187 million.

Revenues also surpassed the company's own guidance given in March for sequential growth of 4%. Instead, sequential sales grew 8%.

Net income of $30.1 million amounted to 8 cents a share, a penny above the Wall Street consensus and an increase from 5 cents for the same period a year ago.

The company saw a $9.1 million pretax benefit from the sale of inventory it had previously written off in 2001. Gross margins were 67.1%.

Altera said it repurchased 1.9 million shares of common stock in the March quarter for $21.7 million, ending the period with $985.4 million in cash and short-term investments.

The company guided for 1% to 4% sequential revenue growth in the June quarter. On top of the higher-than-expected March quarter sales, the second-quarter projection is at least several million dollars above analyst expectations for $192 million.

"Even in a stagnant end market PLDs

programmable logic devices can grow because they can be a higher proportion of the bill of materials of a system, displacing ASICS, or getting into new systems," said CEO John Daane.

Over the next few quarters, Altera expects to see gross margins continue to be buoyed by sales of inventory that was previously written down.