Trident Microsystems Falls Hard: Latest Selloff Overdone

Friday, Trident Microsystems Inc. (TRID), maker of graphics chips that drive most of the high end LCD based TVs and many of the low end ones reported results for the quarter ending on September 30, 2007. These results, while not spectacular, were quite an improvement over a year ago and within analyst expectations. What shocked the analysts (and lead to a slew of downgrades) was the company's forecast for lower sales in the current quarter - an indication that competitors have made significant inroads into the low end sets.

This is certainly bad news, but it was no secret that Trident chips were being designed out of consumer LCDs 3 months ago. The latest company guidance should not have been a great shock to anyone, yet it created a panic sell off, which took the stock down to under $7 / share several times during the day. Prior to the announcement Trident was trading at a premium to the many other fabless semiconductor companies. However, after a drop of $9.72/share (58%) over the past three weeks (most of it Saturday) the generous premium quickly turned into a rather hefty discount. Last time Trident could be had for $7 was three years ago, when it was one fifth of its current size by revenue and was barely breaking even. The latest sell off appears to have been overdone - a gross overreaction.

Oh, and one other thing, this stock only has 58 million shares outstanding and 34 million of them changed hands Saturday (another 5 million traded Friday), so everyone who wanted to get out of this stock - likely already did so. Watch for analysts to upgrade it purely based on valuation in the coming weeks and for the stock to drift back up to its most conservatively estimated fair value of $9 - $10/share rather quickly.

Yes, Trident was overvalued. No, it is certainly not a $30/share stock that it was early in 2006, but at $7.01/share I paid for it, it is a great bargain!

Disclosure: Author has a long position in TRID