Wednesday, September 22, 2010

Altera (NASDAQ:ALTR): Shorting @ Open - here's why

I'm not giving up on my short-term bear thesis yet. I think the market is in for a decent correction which leads me to look at downside plays mostly. Just take a look at what they did to Adobe (NASDAQ:ADBE) after a slight miss in guidance. The stock is down 15% this morning and is being downgraded by at least 4 firms. This should serve as a warning to the mindless buying that has been going on in the tech space recently.

So, today I'm looking at PMC-Sierra (NASDAQ:PMCS), the Communication semi player that warned last night. PMCS lowered its Q3 revenue outlook to $161-$162mn (from $169-$177mn), guided for gross margins at the lower end of its previous range (67.5-68.5%), and for lower opex of $64-65mn (down from $66-$67mn).

- Goldman believes that the shortfall in the quarter was mainly driven by weakness at PMC-Sierra’s OEM customers in Asia, including Huawei and ZTE - which mainly serve the domestic Chinese and overseas emerging markets.

Goldman recalls that on its 2Q earnings call, management noted that there was some inventory that wireline customers in China needed to work down in 3Q before this segment of the business would grow significantly. Their view is that these inventory reductions may have extended to the wireless business as well. On the surface, this seems at odds with Altera’s recent positive pre-announcement, which cited strength at wireless customers in particular. Firm believes that Altera’s strong US infrastructure exposure (and PMC’s relatively weak US exposure) is the primary explanation for the disparity in guidance. As they have written previously, they also expect US specific CapEx to peak in 4Q, and remain cautious on Altera and Xilinx in particular as
they see potential downside to Street estimates in 1H2011.

- On September 17, little known technology shop Wedge Partners was out with a highly cautious note on Altera (NASDAQ:ALTR) saying their checks indicate that Huawei has sufficient wireless component inventories for Q4 and the procurement of components has slowed down currently.

Wedge believes that will affect Altera shipment within the next three or four months. They believe ZTE has the similar problem and will do an inventory adjustment in October.

Firm notes they noticed that the Chinese vendor's 2011 forecast for the base station demand have dropped for the Asia-Pacific region, although Indian demand will be up. They think orders for wireline/ broadband chipsets and automobile chipsets remain strong from Chinese vendors, which account for a small portion of their shipments in China.

Notablecalls: I think the evidence against the PLDs continues to mount. Altera (ALTR) and to some extent Xilinx (XLNX) have been utter teflon stocks. I was really surprised to see ALTR recover from the Wedge Partners comments on Sept 17 (stock went down half a pt initially) and proceed to new highs.

Certainly, if there is an analyst cult stock it's definitely ALTR. PLD's replacing ASIC's is a major theme and the analyst community sure has been riding that one.

Yet, with PMCS now out with a full blown warning, people have to step back and reassess.

Shorting ALTR @ open should work.

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