In February, I wrote two articles (see here and here) on CEVA (NASDAQ:CEVA) recommending that it was a good time to buy when the stock was priced at $17.22. Today, the stock is 19% lower at $13.88. Last week, Ceva actually reported a solid Q1 with revenues up 13% driven by strong licensing sales, and non-GAAP EPS of $0.16, ahead of consensus estimates. But management provided weak guidance for Q2 with revenues of only $10M - $11M, and non-GAAP EPS of $0.03 to $0.05. This guidance was particularly disappointing, as many analysts and investors were expecting the operational rebound that started in Q4 2013 to continue. This led to a sharp decline in CEVA stock over the past week.
On a three-to-six month time horizon, CEVA's stock will be in the penalty box. The transition period of declining revenues and profitability that started in the beginning of 2012 is still not over, which is becoming too long for many investors. The metrics are simply not improving fast enough. On a volume basis, CEVA's Q1 feature phone/smart phone mix was 62%/38%, respectively, in line with 2013, and actually worse than the 54%/46% split in Q4 2013. The mix will improve in Q2, but mainly driven by CEVA-licensee Intel (NASDAQ:INTC) pulling-out of the cheap feature phone market. The expected surge in Ceva-powered 3G smart phones is not expected until later this year. The diversification into non-baseband phone applications is progressing, but will not have an impact until 2015.
CEVA could potentially have another leg down if Broadcom (BRCM) - another major CEVA licensee - follows Intel's lead and also retreats from the commoditized feature phone chip market. If this occurred and CEVA shares fell sharply on this news, I would be a buyer of CEVA shares, as this would have no long-term bearing on CEVA's future profitability.
Our investment thesis discussed this 2014 transition risk, and highlighted CEVA as a 2015 story. For long-term investors, CEVA is attractively priced today. CEVA has 90%+ gross margins, and a highly-scalable, royalty-driven business model where incremental revenues from current levels go directly to the bottom line. Investing in such a company at EV/Revenues of only 3x is a bargain for long-term investors, even if the royalty rebound takes longer than expected.
Disclosure: I am long CEVA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.