Stay Away From Silicon Graphics - Barron's

For more than a generation, computer makers have raced to build the world's most powerful computers and investors have watched with bated breath. Unfortunately for Silicon Graphics (SGIC), says Barron's Tiernan Ray, its latest efforts look like they won't be any more profitable than previous attempts by the company.  

SGI entered bankruptcy protection in May 2006 on declining sales and re-emerged in October 2006. In the most recent fiscal year, SGI had a net loss of $153M on sales of $354M. Its share price is down 59% this year to $7.50, and its valuation trades at less than one-third its trailing sales. Investors tempted by the low valuation should be cautious, Ray warns, as history shows sales of expensive supercomputers are rarely profitable. With a net deficit of $56.4M in shareholder equity, and principal payments due next year on a $132.5M loan, SGI will have a hard time weathering the credit crunch, let alone turning a profit.

SGI used to produce its own chips and software for its large, high-performance computers but has switched to buying standard, cheaper parts. The problem is that other PC makers can do that as well. SGI has a 2% share in the high-performance computers market, while Hewlett-Packard (HPQ) has grabbed a 36.5% share of the $10B market with its cheaper products.

The situation is grim for SGI. With just $40M in cash as of its most recent quarter, it must begin repaying $12.75M in principal to Morgan Stanley next year. It has an operating cash loss of $65M over the past four quarters, and its CFO warns of continued indebtedness. And while increasingly more uses will be found for SGI's supercomputers, the big question is how SGI will make money from it.

Comments

[Tom B:]

Agree. This one is a "dead horse" and has no prospects.

2008 Oct 27 08:28 AM