Early to Warn, Early to Rise

Starting from today, no less than ten technology companies will be making presentations over the next three days at the annual Credit Suisse Technology Conference in Scottsdale, Arizona. This will be the first opportunity to hear from managers how the fourth quarter is shaping up, now that it is already two thirds of the way through, especially now that the festive shopping season is in full swing. Two of the companies in my portfolio, tracked by "Globes", Marvell Technology Group (Nasdaq: MRVL) and Sigma Designs Inc. (Nasdaq: SIGM), will be releasing their quarterly results later today after the close.

Both companies issued warnings for the quarter ended October as far back as a month ago, in addition to providing guidance lower than the market consensus for their next quarter, which in both cases ends in January 2009. Marvell is spread over many semiconductor niches with annual sales in excess of $3 billion and exposure to both the consumer and enterprise markets, and for this reason, the recession is having an impact on nearly all its production lines. Its core product lines are designed for use in the Blackberry handsets made by Research In Motion Ltd. (Nasdaq: RIMM), computer hard drives, printers, and peripherals for broadband and wireless networks.

Given that Marvell was one of the first to warn of the impending slowdown in its results back in August, it will be interesting to see whether last month's warning for both the quarter just ended and the quarter ending in January 2009 - $780 million sales for the first and $705 million for the second - was on target, or whether things have gotten worse in November and that a further decline is likely. Marvell has a substantial presence in Israel, and presumably, like SanDisk (SNDK), it too will have to adjust its expenditure in line with its shrinking revenue, with local jobs also likely to be lost in the process.

Like many other technology companies, Marvell too is currently traded at an earnings multiple of less than 10 on earnings of the fiscal year ending January 2010, and its net cash amounts to 25% of its market cap. If the recession begins to lift at the end of 2009, it will be one of the first stocks to power upward, a climb that will probably begin no later than the summer of 2009.

In addition, Credit Suisse expects that Marvell will be picking up large orders at the end of 2009 for chips from makers of desktop hard drives, including Seagate Technology (NYSE: STX), which recently chose Marvell as the supplier for its next generation of products. As for handset processors, Marvell is due to unveil a series of new product lines at the end of the year, which will expand its target market.

Sigma, on the other hand, is a small niche player in the fairly new market for IPTV processors. Although it is also active in the market for processors for wireless networks and the new Blu-ray disc format for DVDs, for the time being, 95% of its sales are generated by the IPTV niche. I believe that the company's warnings for the October and January quarters stem not only from the overall recession but were also caused by technical delays and regulatory issues relating to the roll-out by telephony companies of their IPTV networks in the various countries.

One roll-out which is proceeding according to schedule is that of AT&T Inc. (NYSE: T), which has set a realistic target of one million subscribers by the end of this month, and has given no hint that it intends to slow down the roll-out next year. That said, we know from Orckit Communications' (Nasdaq: ORCT) progress in Korea that the local regulator there has only just given the go-ahead for the delivery of live television broadcasts over copper wire telephony networks, and three IPTV networks are due to go on the air there in the next few days.

Sigma, which also sells set-top processors to two big carriers in Korea - SK Broadband and KT, will only begin operating there in early 2009, once the network roll-out gathers pace, in line with the rate of subscriber take-up. All three operators in Korea have already chalked up 1.5 million new subscribers for VOD services over the past two years, and while their packages do not include live broadcasts, their set-top boxes can still support this, which means that Sigma is dependent on subscriber take-up to fuel demand for its processors.

Like Marvell, Sigma is also traded way below an earnings multiple of 10 for the fiscal year ending January 2010, but it has a lot more in net cash, which stood at $7 per share at the end of October, compared with a share price of $9.30. The volume of short positions on the stock has fallen recently but it is still very high, one third of the company's share capital. Like Marvell, Sigma is also likely to rise strongly next year, several months before the first signs that the recession is drawing to a close.

Finally, a clarification. Two weeks ago, I wrote that Jim Rogers has not had much success with his recommendations in recent times and I mentioned, among other things, that he was short on the dollar at a time when the dollar is enjoying a strong rally. Following a clarification from him to me in person, and also a note from a friend based in Shanghai, Zachi Schor, I wish to correct myself and make it clear that a year ago Rogers did indeed predict a big rally in the dollar precisely because of all the pessimism surrounding it - and that has been the case. Additionally, he went short this year on financial sector stocks such as Citi (C) and Fannie Mae (FNM). Thirdly, while he did mention a target price of $200 for oil over the long-term, he did not recommend buying it when the price was at the $147 high of last summer.

Disclosure: None

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.