By Abe Raymond
On Monday morning, Google (NASDAQ:GOOG) announced its acquisition of Motorola Mobility Holdings (NYSE:MMI), perhaps in an attempt to diversify its patent portfolio and gain market share in the mobile telecommunications space.
While investors may be late to profit off the merger directly, some may want to consider other technology companies that are involved in similar business strategies.
A small-cap firm that may appeal to investors on a fundamental basis is MIPS Technologies (NASDAQ:MIPS). MIPS produces computing processors that run home entertainment and telecommunications products. This company may not be appropriate for some investors; however, as it operates in a market saturated with competitors and is relatively risky as it is trading at its lowest levels in over a year.
Since the 2008 market crash, MIPS Technologies has been improving its balance sheet. In the year ended 2008, MIPS had $37 million in cash. The company was able to increase that figure to $45 million in 2009 and to $52 million in 2010. Other currents assets also increased similarly. Interestingly, however, the company was unable to increase its property, plant and equipment. In fact, the company owned $30 million in 2008 but decreased its holdings to $12 million in 2009 and 2010. This may indicate a decrease in growth prospects for the firm; it may also indicate necessary cost-cutting actions to best accommodate its deal flow and overall production value.
MIPS Technologies has been able to systematically pay off its short-term and long-term debt over the last three years. As of 2010, the company had no debt holdings on its balance sheet. Its total liabilities have decreased from $108 to $25 during the 2008-2010 time-period. Shareholders' equity has also been able to increase from $45 million to $46 million during the last three years.
Consulting the income statement shows that MIPS Technologies managed to streamline operations by minimizing cost of goods sold, increasing necessary costs like research and development, and still being able to boost the bottom line. Its physical cash flows also corroborate the growth seen in the other financial statements.
If investors strictly consider its financial metrics, MIPS may be undervalued. Currently, the firm trades below the average price/earnings multiple and price/book multiple. MIPS also has an operating margin of 29.6% versus an average of 13.7%; its net margin is 26.2% versus 19.2%. The company's return on equity also fares better than the average competitor's; it returns about 32.9% compared to an average of 22.3%.
On the other hand, metrics like price/sales are higher for MIPS than the average competitor. It has also been experiencing negative EPS growth and revenue growth over the last three years. The numbers may be attributed to the company's performance in 2008.
MIPS Technologies may not be appropriate for everyone's investment objectives. It is a small-cap stock trading at the lowest levels in a year. It also operates in an industry that contains a huge amount of competitors. New firms enter the sector nearly everyday, and having a small market capitalization may not instill a sense of confidence in terms of future growth prospects. MIPS also produces a limited amount of products, and while demand appears like it will grow in the foreseeable future, there are no guarantees.
Some investors who trade on fundamental aspects of business may consider MIPS Technologies to be an interesting equity. Despite the risk involved with stocks of its type, investors who can handle it may want to consider the equity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.