“Geneva Wizards: Tech Boom Domination”

by Travis Johnson, Stock Gumshoe | December 21, 2007 3:57 pm

This one has been floating around for a month or so, and I did write briefly about it when it was being touted as the supplier that would take a 50% leap on iPhone sales (that was back in October[1]).

This is a teaser that came in from Ann Sosnowski at Diligent Investor, who spins a nice tale for this one: “an ‘invisible’ team of Swiss geniuses operating out of Geneva has secured almost total dominance of a surging new $18-billion boom market that could likely create a flood of stock market millionaires.”

She says that this company has taken over the market for the Wii, the iPhone, the smart house, and several other new technology trends.

And she writes that she believes this stock could double next year on the strength of patents, great royalty streams, and “the next great tech surge,” and then double again the following year.

She compares this to AMD, in that the placement of their chips into mainstream devices (new chips in PCs for AMD, components of major consumer electronic devices for this company), and notes how succesful AMD was when they broke into PCs … of course, that was 1999, and I don’t think anyone is likely bragging about more recent performance of AMD.

Now this is not a particularly new or unknown company, in my opinion, and they’re not secret, but it’s true that they’re not themselves a consumer brand. Just like pretty much every other company crafting little silicon devices, they are makers of the guts and they rarely get the consumer’s attention (Intel is pretty much the only consumer brand in chipmaking, though I suppose Dolby and Nvidia and a few others are making inroads, and it cost them billions to build that brand).

And this kind of investor approach is not entirely new, either — do you remember what happened when the first couple generations of the iPod began to gain traction, and when shortages meant that you couldn’t get them in stores? Investors and tech reporters smashed them open, discovered who made the chips and components, and touted those stocks as the supply chain winners behind a hot product. With companies like Synaptics, original supplier of the innovative “click wheel,” it even worked pretty well for a while and did bring the company to the big time, but their shares have been hugely volatile since Apple started diversifying their supplier pipeline.

But I’m getting ahead of myself: What company is this new one of “Geneva Geniuses?” What clues do we have?

Well, they’re a Swiss company (that’s where Geneva is, for the geographically challenged).

They make components of both the iPhone and Wii, and have something to do with smart house technology too.

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Just as an aside, do you really want your house to be that smart? I’d like to be able to turn my lights on or off, make a pot of coffee, or open the front door without searching for new batteries for the remote. But then again, I thought camera phones were stupid fads, too, so don’t listen to me.

Their business is MEMS (Micro Electronic Mechanical Systems), which as I understand it are essentially analog mechanical devices that are built like chips and made of silicon.

Sosnowski calls the part they make for the iPhone the “accelerometer”, which is the position sensor that allows the screen to switch displays when it’s held vertically or horizontally. And the device that purportedly caught Apple’s attention for this was the motion sensor device for the Wii, which this company helped develop, too.

So — is that enough? Methinks yes, and a few readers agree with me (a few have sent in this solution, though reader Ron Redlin was the most recent one and he actually sent in some material to confirm the selection, so he gets an extra gold star) … this Swiss company is …

STMicroelectronics (STM)

Now here’s the bad news: this is the biggest semiconductor company in Europe, a huge company that even has massive investments from the French and Italian governments (they influence the board and own close to a third of the shares, which worries some investors). So it’s not a tiny firm like Synaptics that can be totaly revolutionized by a single product.

STM is a $13 billion company now, even after falling by about 30% from its high of over $20 back in the Spring (largely on Wii and iPhone hype, I gather). By point of comparison Synaptics, when they got into the first iPods, was a microcap — even after a 1,000% or so gain over the subsequent years they’re still just a $1 billion company.

That’s not to say that there isn’t potential — but this is a company that’s just becoming profitable (though analysts think growth should be very nice, they’re projecting a forward PE of 15, and a bargain-area PEG ratio of just a hair under 1). And not many folks like semiconductors or related products right now, so maybe it’s a nice contrarian idea to the extent that’s true.

And they do have some components in these hot products — they reportedly sell the MEMS chip for the secondary (nunchuk) Wii controller, and they do sell that screen thingy for the iPhone and iPod Touch. But it’s not like they own the MEMS technology in its entirety.

The company does have some intellectual property, and they certainly claim plenty of patents — but there are plenty of other companies making accelerometers and other analog motion machines of various types. And it might be argued that in the motion sensing area, Analog Devices has been a stronger performer — ADI makes the primary controller for the Wii, which is essentially the same as the secondary controller, technology-wise, but Nintendo probably sells a lot more of the main controllers (as I can vouch from my own Wii, you don’t use the secondary controller for most games).

So, as usual with a tasty teaser from a newsletter, the market is enticing and well-described, but the competition is largely ignored. STM might be a great buy, and the analysts are certainly positive about their future, but do note that STM is actually significantly more levered to regular cell phones at this point than it is to the comparatively low volume iPhone and Wii nunchuk and fancy smart house controllers that get attention. That’s probably why they’re down a bit from the summer, they depend to a significant degree on high volume sales to Nokia, Sony Ericsson, and the other big handset makers, and there’s plenty of competition in that space, too.

I’d be happy to hear what anyone else thinks about STMicroelectronics, but I’d certainly argue that the company is neither small nor undiscovered, and nor does it have these hot new markets all to itself. On the flip side, if the analysts are right about this one it does look very reasonably priced.

Happy investing — and I probably won’t write for a few days, so I hope all the folks out there in Gumshoe Land have a wonderful Christmas (if that’s your thing) and, in case I dunk my head in too much eggnog and fall behind in writing, let me get ahead of the curve and make sure to throw you a “Happy New Year!” too!

  1. back in October: http://www.stockgumshoe.com/2007/10/we-have-new-leader.html

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