Grant Wasylik took over the newsletters that were started by Frank Curzio over at Uncommon Wisdom (one of the Weiss Research publication groups), and he’s out with a new ad for the Adventure Capitalist “back end” newsletter.
That letter is one of the many “upgrade” newsletters that most publishers funnel you toward — if you subscribe to a “front end” or “entry level” newsletter from any of the substantial publishers, ponying up your $49 or $99 a year, you’re going to be gradually pushed to sign up for their shinier and fancier letters. Most publishers have a “back end” letter or service that’s priced around $5,000, but they rarely actually promote it at that price — in this case, Adventure Capitalist is, again, priced at $5,000 but currently being sold for $1,997.
Publishers tend to use these higher-priced letters to recommend small caps, private placements, options, highly specialized sectors (biotech, mining, etc.) or other volatile or illiquid investments — the kinds of investments that you can maybe tell 500 or 1,000 people about without destroying the bid/ask for that stock, but not 100,000 people.
The intro letter comes from publisher Brad Hoppmann, who gets us interested with this…
“Grant has now uncovered something so groundbreaking, so incredible, he believes it could blow his 2016 results out of the water.
“It’s a single company that is based in a small country most investors are completely ignoring …
“A firm that has been quietly reinventing itself and is ready to explode higher on the back of the biggest technological trend happening in the world right now …
“A $10 stock that, according to simple chart analysis could easily rise 600% and then higher still.”
So what is this stock that’s being used as bait for a $2,000 subscription? Let’s hear a bit from Grant Wasylik and see what clues we can parse out…
“… a nearly-failed former cordless phone manufacturer has suddenly found itself on the cutting edge of the fastest growing technology in the world today, and could soon become …
“The #1 Company in the New Silicon Valley.”
And they hint around about this “New Silicon Valley” notion for a while, but do eventually “reveal” that they’re talking about Israel, which is indeed home to a huge number of US-listed (and other) tech companies.
More enticement from Wasylik…
“This Is Like Catching Big Fish in a Small Pond
“Israel is a small pond with tons of big fish swimming around, and right now only a few of the world’s brightest investors are dropping their lines.
“This anomaly won’t last. More and more people will see the value in Israel and in the next few years it will become overfished.
“I plan on being on the fishing boat with the likes of Warren Buffett, Bill Gates, Jeff Bezos, Michael Dell, and Mark Cuban before everyone else shows up to the party.”
So… what else do we get by way of some snippet-y clues?
“This company was founded in Israel and still maintains its R&D operations there, but it now has dual headquarters in Israel and California.
“In fact, its growth model is now so aggressive it has opened branch offices in every major tech hub around the world including Hong Kong, Japan, S. Korea, and Germany.”
And an abbreviated version of the “back story” behind the company:
“… back in the 1990s, the company made wireless phone components that were among the best in the world.
“Then, the rapid growth of the cellular phone market hit the company hard.
“Wireless phones were suddenly obsolete….
“Now they have a new suite of products that are an indispensable part of the biggest tech boom of the 21st century — namely, the Internet of Things, which is rapidly linking our household items through the web … allowing us to control these items remotely … and creating new ways of living that would have seemed straight out of the Jetsons just a decade ago.”
And then the same argument that any IoT-related stock gets these days — there will be umpteen bajillion internet-connected devices (50 billion is the number Wasylik uses), so whoever makes the important guts of those devices is going to be swimming in gold coins like Scrooge McDuck in his Money Bin. In this case, it’s the “voice recognition” part of the Internet of Things — think Siri and Alexa, only I won’t just be your phone and your virtual assistant listening to you, everything will be listening. Your toaster, your smoke alarm, your car keys. Just not your children or pets (we’re not talking miracles here, just technology).
Here it is in Wasylik’s words from the ad:
“… with 50 billion new devices set to join this trend just over the next few years, it’s easy to see what will happen to the company that creates the very components that allow the IoT devices to communicate with each other PLUS the software that makes clear voice recognition possible.
“In other words, it’s easy to see why the company I’ve been researching could go from a $200 million market cap to a billion or two in no time flat … handing current investors anywhere from 600% to 1,200% without even breaking a sweat.”
He lays out a few “iron-clad reasons” why he thinks this company will be a tech superstar… experienced management, good balance sheet (half the market cap is cash), “the right strategy” with the Internet of Things focus, and a strong growth rate (their IoT revenue apparently rose 83% in 2016, faster than the sector).
So that’s interesting… what is the actual stock?
Thinkolator sez this is DSP Group (DSPG), which is indeed an Israeli company with a history of developing chipsets for cordless phones and a growing business in VoIP phone technology and in chips for mobile and “home automation” devices (and a second headquarters in San Jose, California). This is how they describe themselves:
“DSP Group enables converged voice, audio, video and data connectivity across diverse mobile, consumer and enterprise products – from mobile devices, connected multimedia screens, and home automation & security to cordless phones, VoIP systems, and home gateways. Leveraging industry-leading experience and expertise, DSP Group partners with CE manufacturers and service providers to shape the future of converged communications at home, office and on the go.”
The company is indeed focused on voice, which is a long-time specialty, and the “story” is essentially that they are leveraging their expertise in voice processing to try to get into more and more of the “smart” voice-responsive internet of things and smart home technologies. That has been going on for several years, with limited success so far (the overwhelming majority of their revenue is still from the cordless phone and VoIP phone segments), and the latest product they’ve announced is a chipset that combines their voice technology, the chip design and packaging technology of ST Microelectronics, and the voice recognition technology from Sensory (apparently they’ve been working with Sensory for several years — Sensory is a little bit of a forgotten venture company focused initially on speech recognition, one of those that has neither failed nor exploded with success and new visibility, they’ve been venture-funded for more than 20 years and still seem to be tiny).
The challenge, with these kinds of stocks, is in understanding both the size of the market and the strength of the product compared to the competition — and that’s definitely not a judgement I can make after looking into the stock for a few minutes to solve a teaser for you… so if folks out there in the great Gumshoe Faithful have any insight into this company and its competitive positioning, please do share with a comment below.
It’s very hard to make a living picking small semiconductor stocks, partly because the business changes so fast and partly because so many of them falter under the pressure of a small number of customers if they don’t have a product or design that’s genuinely and substantially better or cheaper or faster (if you don’t have a big competitive advantage, and other companies make something similar to your product with “good enough” performance, then big OEM companies like Apple and Samsung, who buy most of your chips, can pressure you dramatically on price). The pressure to cut costs in the chip business is overwhelming, though it also makes that industry a real source of innovation.
Oh, and yes, they still have 70% market share in cordless phones.
But it is, at least, nice to start out with an investment that has compelling financials — so is DSPG worth a look on that front?
Well, they do have that lovely balance sheet — they have about $47 million in cash and short-term investments, and another $78 million in long-term investments… so, assuming that those long-term investments are really passive and liquid, that is roughly half the market cap. It’s a small company, with a market cap of about $260 million.
The PE ratio is pretty huge at this point, the stock is trading at about 55X trailing earnings and roughly 29X forward earnings — but if you back out that cash and investments, and get to a market cap of, say, $150 million to give us a little breathing room (there would still be a bit of cash on the books then), the valuation starts to look pretty reasonable at about 30X trailing earnings and a little less than 20X 2018 earnings. One hiccup appears to be that the estimates for 2017 earnings indicate that the business is going to get a little worse before it gets better, and no one likes the short-term pain of a year of falling earnings.
It is, generally speaking, the cordless phone business and the older parts of their mobile business that have faltered and brought down revenues for this year, the positive take is that more than 40% of revenue in 2016 came from new products… a substantial increase over the past few years and, perhaps, a good sign going into what they hope will be a strong cycle of new products late this year.
Cordless phone chips accounted for about 60% of revenues at the end of last year, and that segment is, as you might imagine, in continuing decline as the market shrinks… they indicate that they expect year-over-year revenues to fall another 10-15% for that segment this year. The strongest single segment outside of that right now is probably their VoIP phone chip technology, though the various mobile and IoT/smart home applications are also growing rapidly (from a smaller base).
The most recent conference call transcript is here if you’d like more detail. My impression from that call is that they are still very much in transition, hoping for more good sales growth from their mobile and IoT businesses, and continuing strength in VoIP, to counter the slow decline of the cordless phone business and the lack of big new product wins for their HDClear business, which mobile phone makers apparently don’t need (Samsung reportedly included DSPG chips for the “always on” voice command feature in their Galaxy Note 7, which wasn’t quite the “hot” seller expected in the end, but the implication from the February conference call was that “the leading OEM is unlikely to include our HDClear chip in its upcoming smartphone model” … which, reading between the lines, pretty much puts the kibosh on their HDClear technology in mobile being a growth business this year).
I can’t tell you whether it will work or not, whether they’ll get those design wins or whether those design wins will turn into high-volume and successful products… but they reiterate in that call that they expect this quarter to be pretty flat, too, so unless you’re convinced that they’re sandbagging the guidance you’ve probably got time to think this one through and dig into your research. No rush.
Seems like an interesting little guy, and that balance sheet means they’re not in any danger of disappearing anytime soon, but it’s important to remember how hard it is to thrive as a little tiny chip maker in these huge markets — a company with $140 million in annual revenue has a hard time dictating terms to giants unless those giants really need their technology. And if their technology is not unique and very high-end, bringing in more than a couple dollars per chip, they often have a hard time growing to be very large unless they get into mega-volume products. The “internet of things” business is obviously going to be mega-volume, that’s clearly the consensus about where things are going, but that doesn’t necessarily mean that DSP Group’s particular chip designs and technologies for voice recognition/activation features will get into the highest volume products at the best prices… there’s certainly a chance, and the company definitely has an interesting story and a nice balance sheet, but small chip companies without a hot high-volume product can languish for a long time.
That’s all I’ve got for your “caution” perspective on this hype story today — what do you think? Like the cut of DSPG’s jib? Think they’ll sail into glory? Have other favorite stocks that you think are a better buy? let us know with a comment below. And if you’ve every subscribed to Adventure Capitalist, please click here to share your opinion about that newsletter — thank you!