Speaking with venture capitalists these days, it is interesting to hear them lamenting that their mandate often does not allow them to invest in undervalued technology businesses. One told me recently, “this is one of the few times in my career that public company valuations are below private company valuations in technology.”
And I would have to agree – there is blood on Wall Street, and many companies have come under irrational selling pressure in the technology space. This analysis will be Part 1 of a series on fire sales in public technology businesses.
We’ll start with SiRF Technology Holdings (SIRF), a fabless provider of GPS chips and software to the mobile consumer and commercial markets. The company’s products are sold to OEMs and placed in devices such as mobile phones, autos and notebooks.
Why is it so cheap?
On August 8, the International Trade Commission (“ITC”) determined that SiRF infringed on 6 patents held by Broadcom (BRCM) through its acquisition of Global Locate. While this was only an initial indication, the ITC has a history of finding conclusions that align with its initial determination.
Furthermore, on August 26, a judge recommended that all infringing SiRF products (and devices containing them), be banned from importation into the U.S. market. Both SiRF and the ITC have appealed this decision.
This ruling means that many of SiRF’s products will now only be able to be produced through a licensing agreement with Broadcom. The value of SiRF’s IP is also called into question, injuring its potential as a standalone business and diluting its value as an acquisition target.
As one would expect, SiRF’s stock price cratered 25% to $2.44 on August 8 and another 8.5% to $1.82 on August 26. The stock had already been a huge disappointment to investors, falling into the single digits from its 52-week high of $30.61 due to significant underperformance and concerns about consumer spending and price erosion on GPS-enabled devices.
SiRF opened yesterday at $1.07, representing a market capitalization of $64.8 million and an enterprise value of -$41.1 million.
What does the future hold?
To put it mildly, things look bleak. At the macro level, consumer confidence and retail sales look dismal as we approach a global recession.
For SiRF specifically, it must worry about price erosion of GPS chipsets, significant loss of market share (already occurring) and weakening consumer spending.
For 2008, analysts project $249.4 million in revenues and -$64.8 million in EBITDA. For 2009, they project $243.3 million in revenue and -$48.5 million in EBITDA. Not pretty, but then again, we wouldn’t be talking about it if everything was rosy. It is important to note, however, that EBITDA is a poor representation of cash flow, and that cash on hand is only expected to decrease by between $20 million and $60 million over the next 2 years.
This one is all about the balance sheet. As of June 30, SiRF had $105.9 million in Cash and Short-Term Investments, $31.3 million in Accounts Receivable, $25.9 million in Inventory ($20.9 million finished goods, $5.0 million in work-in-progress), $12.7 million in Accounts Payable, $20.8 million in Accrued Expenses, $3.8 million in Unearned Revenue.
This means the value of the net working capital, including cash and equivalents, is $125.8 million. SiRF’s book value, after some major writedowns, is $215.6 million. Remember, SiRF’s market capitalization is only $64.8 million, and its enterprise value is -$41.1 million.
So, it’s quite cheap, but potentially justifiably so given the significant risks to the business in both the short-term and the long-term.
Potential positive catalysts include: settlement or cross-licensing agreement with Broadcom (huge positive), incremental design wins, IP workarounds, recovering consumer spending environment, and acquisition (huge positive).
Potential negative catalysts include: drawn-out legal battle with Broadcom, continued deterioration in consumer spending, continued price erosion for GPS chipsets and PNDs, and continued market share losses exacerbated by injunctions (huge negative).
This is a tough one, given the extreme discount to most valuation measures coupled with clear, major risks to the business model. I am inclined to sit on the sidelines through what will likely prove to be a rough holiday season. One needs look no farther than Omnivision for an example of what competition can do to niche semiconductor markets. For risky investors, buying now could be compelling. For myself, if SiRF drops another 25% or so, I will become more positive on the opportunity given the more limited downside in Q1 2009.