Altera Corp.'s (NASDAQ: ALTR) management upped its long-term business model at its Nov. 7 analyst day to operating margins of 38 percent from 32 percent set previously in 2007.
While this is below the recent peak of 40 percent, we believe it means an upward bias on investors' long term view of its earnings power. The company also made the case for continuing to outgrow the semiconductor industry, said Mark Lipacis, an analyst at Jefferies.
The company increased its long term business model (2015 target) for its gross margins to 67 percent from 65 percent, operating expense to 29 percent from 33 percent and operating margins to 38 percent from 32 percent, while maintaining its view that it should grow 2 times the semiconductor industry.
Altera's management cited tailored architectures and leverage on selling, general and administrative expense as the primary drivers for the improving margins.
Altera's management noted that for 28nm products, it would introduce three product lines tailored for different market segments. Stratix 5 - for high end with 28 Gbps transceivers, Arria 5 in the mid-range for low cost and power, and Cyclone 5 at the low end.
The company believes this tailored approach enables it to better target sub-segments in the market which translates to market expansion and faster than industry growth rates. The company believes it will maintain 60 percent-plus share in the 28nm market, which it estimates will account for 10 percent to 15 percent of its revenue in 2013.
Altera's management noted that it was introducing OpenCL capabilities, which enables its customers to leverage Altera libraries and write software that can support distributed processing on Altera products.
The company believes this puts it about one-year ahead of Xilinx Inc. (NASDAQ: XLNX), and also positions it to compete with merchant multi-core silicon vendors.
The brokerage lowered its 2011 EPS estimate for Altera to $2.36 on revenue of $2.077 billion from $2.37 on revenue of $2.082 billion. The brokerage raised its 2012 EPS estimate to $2.30 from $2.22 and its 2013 estimate to $2.65 from $2.49. However, the brokerage reduced its 2012 revenue estimate to $2.171 billion from $2.216 billion and its 2013 estimate to $2.512 billion from $2.564 billion.
The brokerage reiterated its buy rating on shares of Altera, while increasing its price target to $46 from $43.
Altera has traded at next twelve months price-to-earnings in the range of 11 times to 30 times over the last three years, and Lipacis' $46 new price target assumes a price-to-earnings of 20 times applied to his new 2012 EPS estimate of $2.30.
He said downside risks include macroeconomic weakness causing slowdowns or stalls in communications infrastructure deployments, inventory imbalances in the supply chain, mis-execution in product development or delivery, and valuation.
Altera stock closed Monday's regular trading down 1.40 percent at $38.51 on the NASDAQ Stock Market.