Atmel Corp. (NASDAQ:ATML
) is set to benefit from growth in its touch solutions business, while Microsoft's launch of Windows 8 could drive further upside to the shares.
Atmel makes microcontrollers (MCU), capacitive touch solutions, advanced logic, mixed-signal, nonvolatile memory, and radio frequency (RF) components. In 2008, Atmel gained entry into the capacitive touch market through its acquisition of Quantum Research Group.
The company gets more than 60 percent of its revenue from MCU business, which grew 25 percent in 2011 to $1.1 billion in revenues. Touchscreen technologies revenue rose from $140 million in 2010 to $375 million in 2011 as it commanded significant share of the smartphone market for touch.
Atmel is a dominant supplier of touch solutions to the smartphone and tablet markets. Atmel's maXTouch product is in many of the highest-performing smart phones, including Samsung's Galaxy SII and Note, HTC's EVO and Thunderbolt handsets, Motorola's Droid Razr, Nokia Lumia 710, 800, and LG Optimus.
Meanwhile, Windows 8 is expected to be the significant driver of company's shares. Atmel is one of Microsoft's partners for the Windows 8 launch, and market analysts believe that Atmel has about a 60 percent share of the initial Windows 8 designs.
Microsoft has developed Windows 8 with touchscreen technology in mind. Windows 8 technology is expected to play a bigger role in the interaction between humans and computers through its gesture and voice control technologies.
"We think ATML's touch opportunity has the potential to move to a new level with the introduction of Windows 8, which has been built around the touch experience, and expect ATML to have a substantial share of Windows touch opportunities," Susquehanna Financial analyst Chris Caso wrote in a note to clients.
Caso's current model assumes about 40 million units of Windows 8 touch in 2013 with $5 of content opportunity for Atmel, versus an expected 260 million unit notebook market. Regarding Windows 8, each additional 5 million units is expected to generate $25 million in annual revenue, adding 2 cents to 3 cents in EPS, and represents the largest long-term upside opportunity.
Meanwhile, the analyst said that the company's core MCU business (excluding touch) has experienced an inventory correction similar to what occurred at rival Microchip (NASDAQ:MCHP). The company's core MCU business is now down 35-40 percent from its peak last year, and distributors continue to burn inventory during the first quarter.
"We think Street estimates don't fully model the eventual rebound in revenue as the channel stops burning inventory, allowing ATML to return to shipping at actual customer consumption levels. Our estimates have ATML returning to a $170 mln/quarter run rate in core MCU (equal to 3Q11 levels) by 4Q12, which we think can prove to be a conservative assumption," Caso added.
On the margin front, Atmel expects to get back to a 50 percent gross margin by the end of 2012, driven by improved fab utilization rates. Atmel anticipates gross margins to increase to approximately 54% by the end of 2013.
Though, investors are aware of these goals, the potential revenue upside would also accelerate gross margin improvement, thus dropping more earnings to the bottom line.
"Given the potential growth from touch that we believe is available over the next few years, as well as at least a market growth rate from MCU, we think room exists for multiple expansion from present levels," said Caso, who initiated coverage of Atmel with a "positive" rating and $13 price target.