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Below is a write up on Entropic (ENTR), which at the time of writing was a solid long idea. Entropic moved from $8.34 – $10.35 a nice 25% move in just a few days of work. When doing research on ENTR and running the numbers it looked as if it would be extremely tough to meet EPS projections if the margins were to stay the same. Needless to say a day after my write up ENTR raised guidance and the stock rallied about 16% that day, ENTR than grinded a bit higher, finally topping out at $10.35. By reading the CEO’s commentary I should have foresaw the fact they would raise guidance since he was extremely bullish regarding the quarter.

ENTR than released a statement that they would be issuing 10.8 million shares which was about 14% of the shares outstanding. The stock held up on the news but the sellers finally came to the market and the stock got hit, trading down to $8.50, were I initiated a small position Friday. I figured that the name had been extremely strong and 8.50 was a nice level of support and a 13% pull back from where stock was issued. As I said earlier, the shares issued diluted the value by about 14% so I figured $8.50 could be fundamental support as well.

Over the weekend I read as much commentary as I could on ENTR and didn’t feel great about my position. I got the feeling that the majority of traders felt the stock has had a terrific run and earnings will need to be spectacular in order for the stock to stick above ten bucks. I thought ENTR could possibly trade down to $8.00, which was a nice level of support and the bottom of the $8 – $10 range. With a name as volatile as ENTR I needed to give it one ATR of breathing room, about 50 cents.

Anyway, yesterday morning we opened up and ENTR was trading flat but couldn’t really get going and I had a bad feeling about the trade. Instead of blowing it out and revaluating the risk I stuck with the trade and before I could blink it went down through 8.50 and gapped to 8.35, a 2% downward gap. I stayed calm and watched the stock trade all the way down to $7.70 before bouncing. I ended up stopping myself out at the lows because I had no clue what the hell was going on and was at my daily limit. ENTR rallied all the way back to $8.25, which ended up being a great selling opportunity as ENTR turned down and closed at the lows of the day.

Although I took a beating it was an educational experience; I had a feeling the stock was going to 8 or lower and it did. Next time I have to trust my instincts and get out of the trade. I’m not happy about the beating I took but I feel the lesson learned will pay off in the future.

I still think ENTR is a good long but right now it’s a nightmare, so I’ll sit on the sidelines and wait for it to find a level, gauge the sentiment and make the right trade. And this time when I get the felling I had yesterday I’ll get in with size and make the right trade.

Thesis

As we enter an era of Smart TV and everyone calling for death of Cable/Digital TV there is one final growth story. With big names in tech like AAPL and GOOG looking to compete with Hulu in bringing network television to the internet, Entropic Communications has become a major player in the TV chip set marketplace and I believe the majority of the growth is yet to come.

Business

Entropic was founded in 2001 with a vision to move high definition video into and throughout the home. Entropic went public in 2007 and now stands as the leader in MoCA technology. MoCA (multimedia over coax alliance) technology has changed how multiroom DVR and IPTV video delivery services are transferred throughout the house. Entropic’s products include home networking, broadband access, DBS outdoor unit, and Silicon Tuner.

Home Networking

At the core of Entropic’s home networking business is their chip that allows you the ability to record and share digital videos simultaneously in every room. These also build the technology that gives you the ability to access games from various locations in your house and merge/share media data throughout your home.

DBS Outdoor Solutions

In traditional satellite installation each tuner requires a unique cable from the satellite dish to the STB (set top box) to receive the full channel line up. DBS outdoor solutions eliminates this and can support up to 12 tuners over a single cable and can leverage cabling already in the house. This technology will lower the cost of upgrades and instillation.

Positives

- With Entropic’s technology consumers are now able to watch any digitally recorded show on any other set-top box in the house at roughly 10 dollars more per STB per month.

- A study shows that there are roughly 43 million digital TV subscribers with each owning three TV’s on average. ENTR will receive 8 dollars per TV, making this a million dollar opportunity. Entropic's revenues in 2009 were $116 million.

- Verizon Fios was the first service provider to launch this service and Entropic is expecting DirectTV (DTV), Comcast (CMCSA), Cox Communications, and Time Warner (TWX) to do the same in the coming months.

- Entropic is the major player in the MoCA market controlling 95% as of April and as competition continues to enter the market place ENTR is becoming a possible takeover target. The Benchmark Company feels ENTR would be a good fit for Atheros (ATHR) because of their Broadcom (BRCM)-like bundling strategy. Marvell (MRVL) also recently acquired DS2 Technology. DS2 is not a direct competitor of ENTR but is in the 'no new wires' business.

Negatives

- Entropic’s stock has done very well in the last week closing on Friday at 8.35, ten cents off of the 52 Week high made that day. The stock traded as low as 6.77 on August 25th so a pull back could be in the cards.

- Looking at the numbers, if ENTR keeps margins in-line with Q2 2010 it will be hard to meet the bottom line profit estimate of nine cents per share.

- TTM P/E is high at 135, but this is a new growth story and their isn’t another pure play name in this space to compare with Entropic.

- Competition is starting to enter the market and some analysts see Broadcom potentially taking 33% of the $1 billion market.

I like Entropic because of the potential growth and little competition. Everyone has been speaking of the death of cable/digital TV with the emergence of Smart TV but, I believe it will take years to implement this strategy. For example, look at Blockbuster and Netflix (NFLX). People have been talking about the death of Blockbuster forever and Netflix has really just taken off the last few years. Giving consumers the ability to watch any show at any hour from any STB in the house for a price of $10 a month has tremendous growth and this is the next logical step for home viewing.

Disclosure: Long ENTR

Source: Entropic Communications: Potential Growth and Little Competition