Altera, Xilinx primed for growth

Analysts say that the Programmable Logic Device segment of the semiconductor industry has strong growth potential.

Aug. 3, 1998 12:35 p.m. PT

3 min read

In case you haven't noticed, the entire semiconductor industry has been getting pounded for the last year. According to the Semiconductor Industry Association, the industry is expected to post a 1.8 percent decline in unit sales to $134.7 billion in 1998, due largely to a combination of overcapacity, weak demand from Asia, and a slackening in PC sales.

While investors are eager to position themselves in the semiconductor sector before the next upswing, the recent stampede into the stocks on July 15 seems premature. The group rose 7 percent at that time, due to Intel's earnings being acceptable (read: nothing special). In this environment of limited near-midterm visibility, we think investors should look for a segment of the industry that has greater-than-average growth potential. We think that's the case in the Programmable Logic Device (PLD) segment, and it's a choice between its two premiere players: Altera and Xilinx.

Altera vs Xilinx
The PLD market is one of the fastest-growing segments of the semiconductor industry, with a growth rate of 13 percent and sales amounting to $2.04 billion in 1997. This market is estimated to have a compound annual growth rate (CAGR) of over 26 percent during the next five years, and that revenue will exceed $6 billion by 2002. The dominant segment of this market is high-density PLDs, which include Complex Programmable Logic Devices (CPLDs) and Field Programmable Gate Arrays (FPGAs). These devices are semiconductor chips that offer on-site programmability to customers, allowing the customer--rather than the semiconductor manufacturer--to program and customize the chips to perform specific functions unique to their needs. This segment of the PLD market is expected to grow at a CAGR of over 29 percent during the next five years. Since Altera and Xilinx have a combined market share in the overall PLD market of 62 percent, and more than 68 percent of the high-density PLD market, we believe that these are the ones to bet on for the long term.

Both stocks knocked down
Shares of both these companies have been pummeled in the meltdown of the semiconductor industry, falling an average 40 percent from their 52-week highs and trading virtually in the same range. Xilinx shares are trading at 36.13, 37 percent below their 52-week high, and at 22 times consensus fiscal year 1999 estimates of $1.60 a share, while Altera's shares trade at 38.25, 42 percent off their 52-week high and 24 times consensus fiscal year 1998 estimates of $1.55 a share.

But we prefer Altera
Despite their similarities, we are inclined to pick Altera as our favorite of the two, despite its slightly higher valuation. The reason: Altera has done a better job of stealing Xilinx's market share. Xilinx has always been the dominant player in FPGAs and still holds a 61 percent market share, but Altera has been able to increase its FPGA revenue some 1,300 percent from $11 million in 1994 to over $157 million in 1997, and now holds a 28 percent market share. Over the same period, Xilinx has only managed to grow its CPLD revenue (Altera's specialty) 186 percent, from $7 million to $20 million, and now holds a 5 percent market share compared with Altera's 53 percent.

The market punished Xilinx last Friday for missing estimates by a penny and sent its stock down 4.3125, or 10 percent, on investor concern about this very issue. "Xilinx is losing market share to Altera again," said Hans Mosesmann, an analyst with Prudential Securities. "Their second-quarter results are a disappointment relative to Altera's." Other analysts noted that Altera had been gaining market share against Xilinx for the past two years, while the latter was having trouble introducing new products. Essentially, both companies look good for as long-term buys, but if you have to have one, try Altera.

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