I thought we’d take a look at a new teaser from Chris Versace today, someone I don’t think I’ve ever written about before.
This one caught my eye because it’s being pitched not just as an unknown semiconductor maker in a sweet spot for one of what Versace calls global “Power Trends”, but because he pitches it as a takeover target that should hit $20 before the end of the year … a more than 300% gain. Dunno if he’s right, of course, but that kind of promise means I do want to figure out who he’s talking about.
The newsletter is called PowerTrend Profits, by the way, and Versace’s publisher is pitching it at $49 in a special now, I’ve seen it advertised as having a “list price” of $249 and discounted at $99 before … and it’s one of those letters that’s a wee bit sneaky with the renewal price, they say they’ll automatically renew you after a year at “the prevailing renewal price.” I guess it can’t be all that sneaky, since the Wall Street Journal does the same thing in raising its renewal fees without asking permission, but I prefer it when newsletters lock in a rate for future renewals if they’re going to use autorenew. That’s what we do with our Irregulars, just FYI.
Here’s the intro:
“Meet the One Company Comcast, Verizon and Cisco Can’t Do Without …
“It’s a juicy takeover target whose $5 share price is set to hit $20 before year’s end.
“One day soon, you’ll be watching Fox Business and you’ll see a message crawl across the bottom of the screen. It’ll describe a small, West Coast chipmaker whose price has doubled, almost overnight….”
Except for the “watching Fox Business” part, that sounds pretty good — I can tolerate small doses of CNBC, though I’d probably be a better investor if I didn’t, but Fox Business makes my brain itch.
So what’s the story with this stock?
“Today, a single small-cap U.S. company is producing an irreplaceable semiconductor chip.Are you getting our free Daily Update
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“It’s already enabling your television’s beautiful HD picture… Controlling the Wi-Fi signal you need to surf the web in your house… And enabling connectivity for every online device in your home.
“They’re in everything from set-top DVRs to cable boxes, from broadband routers to converters… You really can’t do much in the digital age without them.
“If you’re reading this email at home, no doubt, you’re surrounded by these chips.
“Yet incredibly, shares of the company making these chips are still less than $5 each.”
That makes this a good opportunity to remind you that a low per-share price doesn’t mean a stock is cheap, tiny or more appealing (just ask anyone who’s owned Alcatel-Lucent (ALU) over the last few years) — though he does go on to say that it’s definitely a small cap, with a market capitalization of $405 million.
And apparently it’s going to grow like gangbusters this year, according to the ad:
“Their consensus estimate for second half of the year revenue increase is 217%!
“There’s no way growth like that can be ignored by Wall Street.
“Especially when the company’s also increasing its number of customers in the next 12-18 months by tens of millions, thanks to deals with China and India.
“It’s only a matter of time before the street’s Fat Cats take notice and start pouring in big money.”
So the potential is either that you profit from that dramatic revenue growth, or you get to see a nice pricey buyout from some big competitor — here’s how they put it:
“This company may not even survive to the end of the year.
“That’s because one of the communications giants it already does business with — names like Comcast, Verizon, Cisco, Samsung, Motorola, Dish Network, DirectTV — could buy the small-cap chip maker out in a heartbeat.
“It’s just a question of which multi-billion-dollar monster beats the others to the punch….
“In May alone, no less than 9 directors or management team members redeemed stock options or bought shares outright. They’re loading up.
“When there’s insider activity like this, a deal’s imminent.”
So … it’s very likely not that simple (and insider buying is very different from insider stock option exercises), but it’s an appealing story.
What’s the stock? For that, let’s sift through some of the specific clues:
“This West-Coast small cap is a $405 million semiconductor company whose products and software are inside devices we use every day. In fact, they’re the only pure semiconductor play in the entire connected home segment.
“If you’re unfamiliar with the ‘connected-home,’ you’re not alone.
“A connected-home is one where all its entertainment/ communication/ Internet devices are linked — enabling shared internet connectivity, Apps, HD video streaming and HD calling.
“Simply put, the connected home is the next battleground in the hi-tech communications arena.
“And just like the leading smartphone and tablet companies (Samsung, HTC, and Apple), the business that assumes a leading position in the connected-home race, will make its investors rich….
“If you have devices in your home that connect to the internet, deliver HD television or allow HD calls, then you probably have this company’s chips in your house.
“They’re found in set-top DVR or cable boxes, broadband routers, modems, gateway devices, Wi-Fi signal extenders, multi-switches, optical network terminals and converters.
“In fact, this company invented the technology that’s become the industry standard for device interconnectivity in the home by:
- Enabling the connection of consumer devices (like a smartphone) with retail components, such as set-top DVR boxes…
- Allowing the seamless transition from broadcast media to online or streaming media in the home.
- Using the coaxial cable already in your house to deliver its digital entertainment into the home.
- Delivering the highest performance, most scalable, cost-effective solutions to meet consumer demands.
“And the company possesses more than 2,000 patents protecting their rights to this technology….
“You see, the company’s chips also empower its partners to maximize their revenue from each subscription, through faster, more secure delivery of digital content to homes.”
And Versace implies that the company is coordinating a specific plan to jump-start growth more rapidly starting now, in the second half of 2013 — with the implication that they did all those big waves of insider buying first, and now they’re going to really start making money. He said insiders have “pinpointed” the third quarter (that’s right now) as the time when their “profit rocket will take off.”
They’ve apparently had a number of design wins lately (that’s when a specific semiconductor gets chosen as a component of a new product being developed) … and we also get a few very specific clues about some announcements this company made about deals with China and India on March 20 and 21.
So it that enough? As my Grandma would have said, “you bet your bippy.” Thinkolator sez that this one is: Entropic Communications (ENTR)
Entropic is indeed a small West-coast fabless semiconductor company (“fabless” means they’re just a designer and seller — they don’t manufacture the chips), their market cap is right around $400 million now (down slightly from the $405 million), the shares are just under $4.50, and there is essentially no analyst enthusiasm for the shares (average estimate is 19 cents in earnings next year, and a price target of a bit over $5 … average recommendation is “hold”). So if Versace does end up picking a big winner here, we can’t say he’s following the herd.
And yes, this is a small company that is very focused on just one small niche of the semiconductor business: chips for managing data flow from coaxial cable to create home networks and distribute entertainment content — so for the most part, that means chips for set-top boxes and other entertainment and networking equipment. Here’s how they put it:
“Entropic Communications, Inc., a fabless semiconductor company, designs, develops, and markets semiconductor solutions to enable home entertainment. Its products include integrated circuits and software as a platform to enable delivery of multiple streams of high-definition (HD) video and other multimedia content into and throughout the home, and which process those video streams for display on HDTVs and other devices. The company offers set-top box (STB) product portfolio, including STB system-on-a-chips (SoCs), data over cable service interface specifications modems, interface devices, and media processors composed of digital STB components and system solutions for satellite, terrestrial, cable, and Internet protocol television markets. It also provides connectivity solutions comprising home networking; high-speed broadband access; and direct broadcast satellite outdoor unit (DBS ODU) solutions, as well as delivers and distributes other media content. The companys home networking solutions are based on the multimedia over coax alliance standard that use existing coaxial cable to create an IP-based network for sharing of HD video and other multimedia content throughout the home….”
Analysts are looking at this and seeing flat earnings this year, and they do not appear to be pricing in any massive spurt of growth in the second half of the year or in 2014 — as of the last quarter, the company was unprofitable, and based on future estimates it’s trading at a forward PE of about 22 with an expected growth rate in the teens. That’s not terrible, but it’s not inspiring as either a value or a growth pick. So what’s the story?
Well, Versace seems to think their core technologies are so strong that they’ll be bought out — which is possible, but I would think that if their technology was so unique or so strong, or riding such a “power trend”, then they’d be making money. It could be that he’s picking them at a perfect inflection point when things are indeed just starting to get better, but the flip side of that is that they’re not very good right now. The balance sheet is fine, with about $90 million in net cash, but they just haven’t been putting out much in the way of profits to encourage investors — the stock peaked around $12 back in early 2010, and since then it has fallen hard several times but has so far bounced pretty well whenever it got down to the $3.50-4 range. They are trading down close to book value (at 1.2X book), and they’re trading for only a little more than 1X sales, so it’s not a crazy expensive stock by those metrics — it’s just that the recent quarters have been quite soft in the
And yes, the CEO in a May conference did say that “we’ve got a great opportunity to grow in the second half” with their design wins. He also said that they have a little under $180 million in cash and no debt — so that tells me their investments listed on the balance sheet are probably fairly conservative ones if he’s classifying them as “cash.” But the cash was about $92 million and investments were listed at about $85 million in the last quarter. He also says they experience seasonal softness at this time of year, particularly for their satellite customers.
There has been some delay in their latest product being adopted by the HD cable set-top box customers, in particularly with one large customer delaying adoption a bit, but they say they’ve now started shipping the “system on a chip” to those customers and others are also picking it up. They do focus on China, India, Latin America for growth in satellite and cable TV stuff — they describe Latin America as particularly appealing because of the fact that they’re about seven years behind the US in migration to HDTV, but the analog-to-digital move is important in many other countries. China is already almost 100% digital, but India has a long way to go. It’s very competitive, apparently, and it will start slow, but there should be large markets.
So really, the “power trend” for this company is that there’s more and more high-bandwidth traffic going into homes, and more demand for using different devices and sharing content inside the home, and that does seem to be a solid trend — we’re seeing more DVRs that are shared among multiple TVs and multiple devices, like iPads, which requires home networking and changing video formats (they are invested in a private transcoding company that does this, too), so the underlying market should still be growing … but it has also been growing for quite some time and this particular company hasn’t turned that into sustained profitability yet.
Their major competitor is Broadcom (BRCM), which has been the big gorilla in the set-top-box chip market for a long time, so there is strong competition — but Entropic does say they are getting great reception from cable companies and other customers because markets with dominant providers tend to get either stale or overpriced, so I’d have to know more about the business and technology before I made any guesses about that. In recent presentations they’ve said that they think their market share is bottoming out now and they have great opportunity to grow it, particularly after adding the “system on a chip” products from Trident (they bought those out of Trident’s bankruptcy, it appears) that lets them offer a bundled system with integrated chips that compete better with Broadcom’s bundled products. There are plenty of smaller competitors as well — and, unsurprising for the tech space, some patent disputes. ENTR is currently accusing a slightly smaller Canadian company called ViXS of patent infringement, that company just had an IPO two weeks ago on the Toronto exchange (VXS.TO) and seems to be addressing a very similar market, so that might be another competitive threat.
So … will it get bought out, or otherwise hit $10 or $20 in the next year? The company sounds optimistic, and though insider ownership is low there has been some insider buying (the options exercises don’t interest me, but there have been five decent-sized insider buys over the last six months in the $3.80-$4.50 neighborhood, and three of those were from officers, not just directors, which is also a good indicator of real management optimism), and it is a segment of the market where there continues to be innovation as providers and device makers compete with each other for better, faster and more robust home media sharing capabilities … so there is at least a chance that the company is poised for an upswing in their business over the next 18 months.
Analysts are not terribly optimistic, but if you calculate their valuation ex-cash and ex-equity investments (total about $175 million across those two categories) and assume that analysts are correct about the 19 cents in forecast earnings per share next year, then you can argue that they really have a forward PE of about 13. Which is not terrible, but it’s certainly a lot more expensive than Broadcom (BCOM), which is cheaper, already quite profitable, and expected to grow almost as fast (but is perhaps 40X larger). The company reports earnings in two days, on Wednesday, and they’ve already cut the guidance for the quarter and talked about some layoffs as they focus on their key markets, so investors will probably be listening much more closely to what management says about the second half of the year than what they report about the expected-to-be-weak second quarter.
Sound like the kind of thing you’d like to add to your portfolio? Think they’ll see a buyout in the near future from one of their competitors? I can see the possibility of a set-top box/networking company like Cisco or Google/Motorola perhaps being interested — but, frankly, they don’t have to buy the company to get the product, and it would be either dilutive or trivial in size for most big companies, so it would have to be a “strategic” acquisition to try to differentiate their products. I don’t expect Broadcom would be allowed to easily buy them, since together they’d have pretty dominant market share in some little segments, but you never know. But that’s all based on a very quick look at the company, so you can feel free to share your (more informed, I’m sure) opinion on Entropic with a comment below. Thanks!