The Debate Over Genesis Microchip

| About: Genesis Microchip (GNSS)

There’s a fascinating debate going on over Genesis Microchip (GNSS) - and someone is going to end up looking really stupid.

First, the facts: Genesis last night reported perfectly good results for its fiscal second quarter ended September 30, with revenue of $69 million and pro-forma profits of 16 cents a share both ahead of Street estimates. But - and this is a big but - the company said that revenue in the third quarter would be just $52 million to $57 million, dramatically below the $72 million or so the Street was expecting. The problem, the company said, is “softer demand from a few key customers primarily in its TV business, and lower orders to date as compared with the same point in prior quarters.”

The big issue, the analysts reported this morning, is that the company has lost a significant chunk of its revenue from the Philips television business, while some key customers, Philips included are losing market share. Three firms - Longbow Research, CIBC World Markets and Roth Capital - cut ratings on the stock. Meanwhile, Andrew Huang at American Technology Research has provided a spirited defense of the stock today. They can’t all be right. Here’s how the debate shapes up:

The Bear Case:

  • Daniel Gelbtuch, CIBC: GNSS has lost significant Philips revenues, and key customers are losing market share. We believe investors should avoid GNSS shares…GNSS trades at an undeserved premium to its peers…givne the currently/seasonally robust DTV [digital television] macro environment, GNSS’ stumbles are ominous, especially with escalating (Taiwan and Broadcom (BRCM)) competition in 2007 and beyond.
  • Jay Srivatsa, Roth Capital: Downgrading to Hold…While we believe the company still has [a] strong IP position, especially in the LCD TV space, we note the window of opportunity for design wins for LCD TVs for [calendar 2007] is practically over. Until we witness positive developments from the company, we would advise investors to stay on the sidelines.
  • Jennifer West, Merriman Curhan Ford: Although the company’s stock price has come under pressure and now trades at less than 1x book value and at 1.6x our out-year revenue estimate, we continue to take a wait-and-see approach onthe stock due to the disappointing guidance, share losses and also based on the company’s execution in bringing an integrated digital solution to market in a timely maner to capitalize on the 2007/2008 design win cycle.

The Bull Case, a.k.a., AmTech’s Andrew Huang’s Case:

Huang today offered 7 reasons to buy the stock aggressively under $10:

  1. Sentiment at an All-Time low.
  2. Mass downgrades frequently mark the bottom.
  3. Technology still has value.
  4. Strong customer base.
  5. Worst Case Scneario; i.e, he is already modeling in another 10% revenue slide in the March quarter from December.
  6. Valuation, i.e., Genesis has $5 a share in cash, and tangible book of $7.
  7. Takeover candidate: He thinks potential buyers include Texas Instruments (NYSE:TXN) and STMicro (NYSE:STM).

Genesis shares today are down 72 cents at $10.23, after trading as low as $9.42. Clearly, at least some people are taking Huang’s advice.