Zeroing In On Zoran: A Company Capable of Holding Its Own

Watching changes in the graph for Zoran Corp. (ZRAN) over the last few years is enough to make you seasick.

Zoran, as I see it, is one the most resounding failures of analysts covering the chip industry. If I were an analyst, I would have set a target price for this stock of $26-28 for the next twelve to eighteen months, 42% above its current price, without any due diligence. Why? Because if you take the analysts' consensus for the last five years, you will notice that the expectations for Zoran's performance were affected to a much greater extent by the business environment of video and imaging chip design than by what actually happened with the company.

Zoran, it should be noted, designs chips for specific purposes, such as digital cameras, image transmission and others. These chips are ordered from fabs such as Tower Semiconductor Ltd. (TSEM), and essentially, they are tailored to suit customers' requirements.

Zoran's business depends on the orders it gets from digital camera and video games manufacturers. This market has a number of companies, all of which are vying with one another for market share. Zoran was once one of the smaller companies, but today it is one of the leaders in this niche. As in every business rivalry, the battle between the competitors is over quality, price and service, and Zoran has proved itself capable of holding its own in this contest. The last blow that the company's stock took between April and July 2006 shaved nearly 52% off its value. It was the outcome of the backdating story, the mention of which alone is enough to cause irreparable damage. It subsequently transpired that in this case, everyone had made a mountain out of a molehill.

Now Zoran has published excellent financials, and the stock has risen strongly in response. Can anyone explain to me why it should still be traded at such a low market cap compared with what it had last year, after results like these? I have a suspicion that were it not for the analysts, Zoran would have looked different, and to prove this, you only have to look at Silicom Ltd. (SILC). Silicom has no analyst coverage at all and has been gaining since it published its own results, something that Zoran should have been doing as well. Just imagine what the analysts would have written about Silicom back in 2002, when it plummeted to $0.20.

Disclosure: The author invests in various equities and may have a personal holding in the stock of companies named.

ZRAN 1-yr chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.