GPS Player SIRF Has Lost Its Way

For anyone not familiar with SIRF Technology Holdings (Nasdaq: SIRF), they make the semiconductor chips that go into global positions systems [GPS] from companies like Garmin and TomTom. Well, to be fair, they started working with Garmin (Nasdaq: GRMN) relatively recently, but you get the idea. They certainly have competition in their part of the GPS market, coming from guys like Qualcom (Nasdaq: QCOM) and Trimble (Nasdaq: TRMB), but I pretty much see SIRF as the market leader.

I was holding shares of SIRF when they totally crapped out after their earnings call. There were some good reasons I was long, and some bad. Basically I saw, and still see, a lot of potential ahead in the area of GPS, SIRF is really the leader when it comes to chips in this space and, at least for a while, the stock had some nice momentum going. That was the "good" side. On the other hand, this was really a momentum play that I just left on the table a little too long and I wasn't diligent enough on watching a stock that I knew had an unsustainable valuation. It's also a concern for the industry as a whole that more and more of the volume is moving via the consumer channel. That's not really a good thing for the chip guys - value add or not you're going to get your margins squeezed when you're going mass market retail.

Anyway, I saw the hub-bub like this:

1) SIRF basically got hit with the same Mack truck that every other high-flyer in the tech space got hit with, from Sierra Wireless (Nasdaq: SWIR), to Rackable Systems (Nasdaq: RACK), to Google (Nasdaq: GOOG). Right now in this market unless you're curing cancer or finding a new way to print money you're likely going to take a beating.

2) The stock had a pretty hefty valuation - over 35x trailing earnings at the beginning of July and even higher back in May. With a valuation like this comes some amount of expectations on future growth. When management talked about the quarter ahead they were, well, cautious to say the least. In a skiddish market like this, caution from management is not so good for the stock.

3) Some of the bulge bracket analysts really just panned the stock and the growth prospects. While some people like poo-poo Wall Street analysts, I think it's pretty critical to keep track of what they're saying because, like it or not, when the big boys start saying sell, you can bet on there being pressure on the stock.

4) Options. From my poking around (yes, including on Yahoo! Message Boards) it seems like there's a lot of concern around the options expenses showing up in SIRF's results. As far as I could tell from my research, the options expenses that are showing up are largely from options that were granted to management and in conjunction with acquisitions in the past - the reason that they're showing up now is because of new option expensing requirements under SFAS 123. Regardless, though, of whether these are legacy options or a sign of management over-compensating themselves, the number of diluted shares has gone up nearly 10% over last year, and unless this gets under control it's going to dilute any earnings that can go back to the shareholders.

So that all said, with SIRF down over 50% since March, is it time to take a chance? My take is no. I ran a valuation on the stock assuming a 30% long term growth rate and came up with a value of around $24. Of course, post the Q2 conference call, you have to question whether 30% growth over the next couple years is possible. Additionally, you have to consider the number of shareholders, particularly momentum traders (not unlike the SIRF purchase I made!) who got caught with their pants down on this one. Now those guys are sitting on a paper loss hoping to recoup something. For a good while now, every time the stock gets some upward momentum going there are going to be bunches of these guys trying to rush out the door.

So while I still like a lot about the GPS market, I am going to stay away from SIRF. Looking for a safer play in the GPS market? Check out NovAtel (Nasdaq: NGPS).

SIRF 1-yr Chart

Comments

[Howard Kalt]

Overlooked the fact that the short interest has doubled in the past 2-3 months will be a factor as well. Should be a more attractive price down the road.