This teaser was first Gumshoe’d on December 10. The stock has bounced around a bit and has spent some time over $6 since then, but now that the shares are dipping under $6 again the pitch from Roadrunner Stocks has been updated slightly to call this “The Best Tech Stock Under $8.”
The company teased here by Jim Fink issued some cautious guidance on part of their business in mid-December and the shares dipped a bit, then there was chatter about them putting themselves up for sale last week and the shares spiked briefly… other than that, no substantive news since the teaser campaign started — earnings are likely to be reported in about two weeks. What follows is unchanged since it was published on December 10:
There are a lot lot lot of advisers throwing out “buy this one-time opportunity” in oil and energy stocks these days, since we all love to be contrarian and buy cheap, but after such a dramatic price drop in oil I’m taking a break from that topic for the day… I just don’t have a clue whether the next big move is up or down, and the stocks are all overreacting every which way.
And we’ve also been inundated with biotech ideas, including yesterday’s pitch from the new Stansberry Venture, so I was looking through the pile for teases that didn’t have anything to do with either energy or medicine… and a pitch that came in yesterday for Jim Fink’s Roadrunner Stocks stood out. That letter’s been around for a couple years now, with one big winner (Gentex) and a few losers (Carbo Ceramics) last year… his teased picks that we’ve covered this year haven’t been dramatically good or bad so far.
And now he’s telling us he’s got a “picks and shovels” play on the next great wireless standard, a company that will win regardless of which new standard for in-home wireless gets adopted, and he calls it the “Best Stock Under $6.”
So… wanna know what it is? Me, too… let’s check out the clues.
Fink starts us out by laying the groundwork for the showdown — and, to be fair, this is a long time coming, WiGig and WirelessHD have both been promoted by their respective developers and consortiums for several years already. This is the “story” part…
“There’s a battle raging in the fast-moving world of Silicon Valley. Like VHS tapes snuffed out Betamax… and CDs killed cassettes… the winner of a new ‘gold standard’ for data is about to be crowned.
“I’ve discovered a tiny company that figured out a way to make money from this new $10 billion market—no matter who comes out the winner….
“The tiny company I’m about to show you has the potential to turn every $10,000 invested into a life-changing $214,290….”
And the “battle” is being waged largely because of the “Internet of Things” — the always connected world of all kinds of stuff, from refrigerators to thermostats to watches to door locks. That will put much more pressure on networks in general, as many more devices have to connect to the internet… but when you’re talking about the “smart home” part of it the pressure will largely be on WiFi networks.
Here’s some more from Fink:
“… the Internet of Things is an immense market.
“That’s no secret.
“But what most investors overlook are the pockets of profits hidden inside markets like these….
“The technology driving this growth makes it possible to transfer data 18 times faster than Wi-Fi….
“It operates on a totally different frequency (60 GHz) than Wi-Fi, and it’s impressive.
“We don’t need to bother with the technical details here. But suffice it to say, its goal isn’t to replace Wi-Fi but rather to supercharge it.
“And it does a tremendous job.
“So much so that 1.5 billion more devices will use this technology by 2018….
“First, though, a major problem needs to be solved.Are you getting our free Daily Update
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“There’s no ‘gold standard’ for this frequency.
“And that’s set up a battle between two powerful groups. Each is vying to be the winner in this $10 billion market.
“This showdown has created a massive opportunity for one small company….”
That’s what it always comes down to, doesn’t it? We start off with a huge industry-wide trend that sounds familiar enough to everyone (Internet of Things, WiFi needs upgrading), and then we skip right on down to the “one small company” who will have a huge opportunity because of it. It’s a time-tested approach for advertising copywriters, and it sure works — when you throw around $10 billion as a “market” and then hint at a much smaller company who can grow dramatically to serve that market, your brain almost automatically connects the dots in a straight line and you start to imagine the armored car dumping a load of Krugerrands on your front lawn.
So who is this “one small company?” Let’s see what hints we get from Fink:
“Just as VHS tapes snuffed out Betamax… and CDs killed cassettes… there’s a new turf war taking place for high-speed data supremacy.
“On one side is the WiGig Alliance.
“Members of this group include industry giants like Qualcomm and Microsoft.
“Qualcomm believes so much in WiGig’s future that it paid 30 times sales to buy a company leading the charge in its development.
“On the other side of the battle is the WirelessHD Consortium. It boasts members like Panasonic, Samsung, Sony and Toshiba….
“That’s why I’m so enthusiastic about the company I’ve found.
“It’s set to profit no matter which side wins the battle.
“How can it do that?
“Simple: It’s a modern-day ‘pick and shovel’ company.”
And then he gets a bit more specific, so we do get a few juicy tidbits that we can throw into the Mighty, Mighty Thinkolator…
“It’s a tiny company that leads the market in high-speed data connectivity—with over 500 patents in three major product areas.
“I’m 100% sure that if you’re reading this on a laptop or desktop computer, you have a piece of this company’s technology.
“And you’re using one of its products every time you fire up your flat-screen TV, too.
“What’s more, nearly a billion mid-range smartphones in China and India use this company’s technology for data connections….
“… how can a company with so much upside potential be so cheap?
“The sad truth is most analysts don’t see them as a major player.
“Especially in 60-GHz data where they’re throwing around names like Qualcomm, Intel, Microsoft and Dell.
“Plus, many feel WiGig will come out the winner.
“And since this little-known player has a strong presence in the WirelessHD Consortium, it’s dismissed as an also-ran almost immediately.
“But here’s what everyone is missing.
“This company is a player on both sides of the standards battle.
“In fact, it’s about to roll out its own WiGig product any day.”
So that ought to be enough to get us started, right? Along with the fact that he says it’s the “best stock under $6” to give us one more data point to check… and actually, he gets more specific on that, too:
“The tiny genius I’ve just showed you is only trading at 1.4 times sales—$4.59 a share—which makes it a flat-out bargain.”
So who is it? Well, the good news is that Jim Fink was right. The bad news, says the Mighty Mighty Thinkolator, is that he must have sent this out to his subscribers about two months ago and just had a copywriter turn it into an ad pitch this week, because the stock was at $4.59 and 1.4X sales in October… but it’s now at $7 and 1.8X sales. This is, almost certainly, Silicon Image (SIMG), which has been doing well for about two months but also had a big pop, driving the stock over $6 for the first time since April, in just the past couple days.
There was a pretty good analyst note from Needham in Barron’s on this one back in August that gives a little bit of an idea of where they’ve been, giving some perspective on why the stock was depressed over the Summer. So there have really been two events helping to drive the stock higher since then — they beat on earnings in October, or at least they beat the pessimism that had been baked in a bit, and they formed a new subsidiary, with an investment from Qualcomm, on December 4.
Silicon Image is a fabless semiconductor company (meaning that they design chips, but they don’t build them — they use contract manufacturers for that, which is why their product gross margins are in the 50% range), and they’ve primarily been a chipmaker for big screen TVs — they helped to develop the HDMI standard for HDTV, which is probably what connects your cable box to your television, and their newer MHL (Mobile High Definition Link) helps your phone stream content to your TV (among other things — it’s a mobile HD connectivity/data transmission standard). And yes, they do have a strong presence in mid-tier smartphones, particularly in China — Mobile took over Consumer Electronics (mostly TVs) as their biggest market, by revenue, in 2012, as consumer electronics revenue has been shrinking and mobile has been growing fast.
And that, actually, was part of the problem earlier this year — mobile sales were stagnant because of competition… though consumer electronics sales grew surprisingly nicely, presumably because of streaming devices and, importantly, next-generation TVs (we’re finally getting to the point that 4K/Ultra HDTV televisions are getting down to “reasonable” prices, with big ones dipping under $1,000 for the first time this holiday season… so lots of TV companies are hoping for an upgrade cycle like the one that drove Corning and Silicon Image and LG and Sony to new heights with the first HDTV/flat screen upgrade cycle a decade ago). The transcript of the third quarter conference call gives a really good overview of where SIMG thinks they are, worth a read if you’re interested in the stock.
The first reorganization/carve-out that they’re doing is the creation of Qterics, which is what they called their “services” business, including the UpdateLogic business that they bought just this Spring… since Qualcomm is investing in that division with a $7 million capital infusion in exchange for a 7% stake, we can infer that perhaps it’s worth $100 million. And that is very much pointed at the “Internet of Things”, though it’s more about the language these machines use in speaking to each other than it is the actual bandwidth or frequency or standard of data transmission.
That’s not the business Fink says he is excited about — he’s talking about their 60Ghz business, which is more about the “replacing or supplementing Wifi” stuff. That they also plan to carve out as its own separate business to develop HDWireless and WiGig products and to give more “voice” to those newer standards to help get more products built with the technology (remember, this is just a chip designer — they have to convince product designers to use their technology and design products using their chips)… it’s still very much a segment in need of partnerships and critical mass, it appears, so they’re trying to help build that by giving the division its own name and leadership team. And, of course, it doesn’t hurt that they think carving out these businesses as separate (but still owned and controlled) entities will help investors to recognize the value of these segments and stop thinking about Silicon Image as just a chip designer for the MHL and HDMI standards.
Will it work? Well, that “recognize the value” part is working already, at least a little bit, since the Qualcomm endorsement drove the shares up by a buck (essentially, carving out this separate business that might have a value of $100 million increased the market cap of SIMG by about $75 million — so perhaps that “value” was indeed hidden… or maybe it’s just an overreaction to QCOM’s $7 million investment in SIMG).
SIMG is not necessarily a cheap company — it’s small, with a market cap near $500 million, they don’t have great earnings growth and their recent spurt has gotten them pretty close to most analysts’ price targets already, and they’re trading at about 25X expected earnings for next year… but I can see how it’s possible for them to get a nice boost if 4K/Ultra HDTV takes off, and maybe also if they can really light more of a fire under next-generation Wifi/60Ghz standards and drive wider adoption. That’s about all I know about them — it’s an interesting company, with a great history as an IP developer, and they’ve been very focused on some key standards that have done well in the past… but I don’t know whether they’re likely to go on a huge run and generate 2,000%+ returns as Fink intimates in the ad. There is, of course, still plenty of uncertainty and they’re not operating in a vacuum — there are other chip designers who are also quite focused on 60GHz, and there isn’t really even a market for devices that use this frequency just yet.
My impression is that Fink’s argument is perhaps reasonable (not the “return 21X your money” stuff, but the positioning SIMG has in the market in this early stage), and they are a real company with chops in this area, but that doesn’t mean HDWireless or WiGig are going to drive SIMG’s performance over the next year. They are also, like most tech stocks, in fine shape on the balance sheet — they’ve got a decent base business and a royalty stream on HDMI, and about $150 million in cash on the books and no real debt, so they’re not a fly-by-night or a likely failure… they just might not grow as much as some folks are hoping.
I’ll come back to this one and take another look if and when I get confident about 4K/Ultra-HDTV, TV viewership has suffered some at the hands of tablets and “video everywhere” mobility, but TVs are still a big market — the next upgrade cycle could sneak up on investors who might have forgotten the dramatic TV upgrade cycle of the early 2000s, or been burned by the failed “3D TV” upgrade cycle that manufacturers tried to drive through a few years ago.
That’s just my quick impressions after a couple hours, though, and it’s your money — so what do you think? Let us know whether you’re a fan of Silicon Image (or Roadrunner stocks, for that matter) with a comment below… thanks!