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LSI Corporation (NASDAQ:LSI) is a company that designs semiconductors and software that accelerate storage and networking. The company is the market leader in SAS, enterprise RAID, and application acceleration. According to company's website, Industry analysts expect that storage will grow 35% per year for the next several years and network traffic will grow by 33%. The company has growth potential and Marvell (NASDAQ:MRVL), LSI's main rival, is being forced to pay a fine that could be in the billions. The stock is currently hovering near 52 week lows, but the company has a promising future.

Competitors

LSI's direct competitors are Marvell, NXP Semiconductors (NASDAQ:NXPI), and STMicroelectronics (NYSE:STM). LSI stands to gain from Marvell's woes. On December 27th, Marvell announced a $1.2 billion dollar loss to Carnegie Melon University in a patent lawsuit and the award is one of the biggest in U.S. history. On February 11th, it was announced that Marvell could have to pay three times the $1.2 billion jury verdict that the company was ordered to pay in December. LSI will be able to acquire a more significant market share because the patent loss will financially cripple Marvell. Marvell had a larger market capitalization, higher EPS, and the company produced more revenue last year. Despite Marvell's past performance, LSI could become the dominant company in the storage controller market because of Marvell's woes. NXP Semiconductors and STMicroelectronics have larger market capitalizations, but they both have negative net income.

Fundamentals

The TTM P/E ratio is currently 20.54, which is the same as the industry average. The forward P/E ratio is 9.99, which is significantly lower than the TTM P/E ratio. One of the biggest positives about this stock is the lack of debt. The debt to equity ratio has remained at 0 since the fall of 2010. One of the biggest downsides is the decline in TTM net income. Net income for the company was $396.53 million in March of 2012, but it fell to 202.66 million by the end of 2012. Quarterly YoY revenue growth is 14.70%. The TTM leveraged free cash flow is $402.09 million. The 5 year earnings growth forecast is 15.93%. The PEG ratio is .95, which could indicate that the company is undervalued. The TTM profit margin is currently 8.09%.

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LSI's Future

The company has major potential for growth over the next 5 years and the company has a broad portfolio of products. In 2012, LSI acquired SandForce. SandForce greatly enhances LSI's ability to meet customer demands. The company will be able to offer custom and standard flash storage processors, which is unique in the industry. According to the company's website, LSI is primarily focused on the long term trend of increasing traffic and data growth. The company has the potential to benefit from cloud computing, big data, mobile networks, video, and even social platforms. The compound annual growth rate for storage capacity needs will increase by 50% from 2011 to 2015. Despite these future needs, the CAGR for IT sending is 5%. LSI is attempting to bridge this gap. The company provides its SAS and MegaRAID solutions for large companies such as HP (NYSE:HPQ), IBM (NYSE:IBM), and Cisco (NASDAQ:CSCO). As shown in the graph below, the demand for storage is exploding and it will jump from 1.2M PB to 35M PB by 2020. LSI is well positioned for growth in the HDD market and their HDD SoC share has gone from 18% to 30% in just 4 years.
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Potential Risks

2012 wasn't exactly a great year for the company and net income dropped. The company said in their Q4 2012 conference call that they witnessed market-related softness in the second half of 2012 and they expect the softness to continue in early 2013. The company believes that Q1 will be weak because of macroeconomic uncertainties, as well as softness in PC and server end markets. Despite the recent weakness, the company believes that Q1 will be the trough for their revenues and growth will pick up after Q1. Soft PC sales could potentially impact the company, but the company is focused on plenty of other market segments. LSI's customers currently include many tech giants such as HP, Dell (NASDAQ:DELL), and IBM. However, many of these large tech companies haven't performed well lately. The weakness in tech companies such as Dell and HP could potentially hurt demand LSI's products.

Conclusion

The demand for storage capacity needs will grow at very fast rates over the next few years. Despite the need for more storage capacity, the current spending by IT companies is not keeping up with the need for more storage. LSI is trying to bridge the gap. The company has such major potential for growth because traffic and storage will grow very rapidly over the next few years. Marvell's current situation could potentially help LSI over the long term. LSI will remain weak for the first part of 2013, but the company has long term potential.

Source: LSI: A Debt Free $7 Tech Stock