IPTV Industry Is Up and Coming

The forces responsible for much of the volatility on the markets in recent years are the giant hedge funds, which use short sales as a tool on a daily basis far more often than classic share purchases as a short or long-term investment. Last Friday saw the publication of the short levels for mid-April, which provide something of an insight into the hedge funds' moves as the first quarter results season goes into full swing.

In chip giant Broadcom Corp. (BRCM), for example, short interest in the stock climbed by no less than 80% to 31 million shares, just as the company was on the verge of unveiling its results. It was hardly any wonder then, that following the good results it published, Broadcom is one of the big hits of April, with a 46% return, as the bulls trampled on short traders who had to take heavy losses after they bought back shares at high prices.

A similar fate lay in store for those hedge funds that sold short positions in SanDisk Corporation (SNDK). Short interest rose by 45% up to the last two days prior to the company's results, to 21 million shares. This was what sent SanDisk's share up after the results were published even though the company did not meet the market's earnings estimates. Unlike Broadcom, the hedge funds had got their homework right with SanDisk, but apparently expected things to turn out far worse with the company even reporting a loss. Once these fears were proven unfounded, the short funds had to buy back shares, which is why SanDisk gained 19% since the beginning of April by the start of trading on Monday.

Of the Israeli companies, Alvarion (ALVR) will be one to watch when it unveils its results next Monday, given that the level of short interest in its stock has climbed 40% to a multiyear high of 2 million shares. As the company has not issued any warnings for the quarter, the short traders are apparently betting on lowered guidance for the rest of the year, an event that could very well happen considering the company did not bag any of the large projects due to be rolled out in Japan and Australia.

On the other hand, as in the case of SanDisk, one can never tell in advance how the market will take such news, since at its current price of $6.50, Alvarion's share may have already factored in all the bad news, and as in the cases mentioned earlier, the short traders could find themselves having to buy back here as well.

One of the short sellers' biggest successes last year was multimedia chip company Sigma Designs Inc. (SIGM), which recently rejoined my portfolio, tracked by "Globes." Sigma had an amazing jump from $8 in the summer of 2006 to $73 in the fall of 2007, as a result of the phenomenal success of its IPTV processors, a new market which is still in its infancy. The climb in profit accounted for the climb in the stock, since it ended 2007 with earnings per share of $2.45, a tenfold increase on the previous year.

Sigma's share began its unexpected downslide in November 2007 at the very peak of its success, after the hedge funds began aggressive short selling. Short interest in the stock has since doubled, reaching 11 million shares at the end of March, with nearly half of the company's shares floating on the market. Most analysts couldn’t fathom what was going on, and the company didn't say much either. Only a select number of short funds were privy to insider information according to which supplies of Sigma's set-top boxes were beginning to pile up at its largest customer, Motorola Inc. (MOT), for logistical reasons rather than tanking demand.

One of the amazing things about Sigma is that the short funds were in no rush to realize their profit even when the share collapsed from its high of $73 to $25 by mid-March, since they wanted more and calmly held on tight to what they already had. Once they felt the Motorola affair was old news, especially after the company itself finally acknowledged the temporary difficulties it was having with its largest customer, the short traders moved on to the next stage. While there may be no direct contact between short traders and analysts, there isn't anyone on the market who does not believe that such contacts sometimes occur.

In mid-April, Tristan Gerra, an analyst at investment house Robert W. Baird & Co. published a report that revealed what was already common knowledge on the market. Broadcom was entering Sigma's market and was about to win orders from Motorola. Investors panicked, sending Sigma plummeting yet again to a new low at $15. It wasn't until April 15, the day the aforementioned analyst's report came out, with the freefall already underway, that the short traders decided they'd had their fill, and the short level began to drop, although at 9 million shares today, it is still quite high. The share's recent rebound to more than $19 in trading last Friday, is due, among other things, to the closure of short positions, and the fact that short traders appear to have no more tricks up their sleeves.

Getting back to the crux of the matter, Sigma is a relatively young company in a new market, only just beginning its meteoric climb. The market in question is advanced television broadcasts, delivered directly by telephony companies over IP networks in head-to-head competition with the cable companies. Sigma was a pioneer in this field with extensive knowledge in video compression, which was why it managed very early on to sign a collaboration agreement with Microsoft Corp. (MSFT). Its processors are now the only ones compatible with IPTV set-top boxes operating on Microsoft's operating systems, which control 70% of the market.

Broadcom's entry into the field is not as big a catastrophe for Sigma as the share collapse suggests. Broadcom will not begin selling until 2009 and by that time the market will have grown to dimensions large enough to accommodate several chip suppliers, just like in any other niche. In addition, Sigma has a strong position in the market for the new Blu-ray disc format for DVDs, and it also recently began producing wireless chips for the digital home. At $19 a share, and assuming that just some of investment house UBS's predictions for it in the coming years become reality, Sigma is a real bargain. UBS forecasts earnings per share of $2.20s for 2008, $3.17 for 2009, and $3.62 for 2010.

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.

Comments

[PK deC'ville]

Shlomi,

I'm interested in what you have to say about this:

Isn't it rue w/ all the demands being placed on internet backbone bandwidth, real time IPTV may suffer considerably, perhaps terminally? (Pun unintended, but I'll take it.)

[seattleite]

Also, what i dont understand is, why dont the SIGMA management come outside and make a statement, like announce more buybacks or confirm the yearly earnings or something like that, that brings confidence amongst the present and potential shareholders

[User 202507]

SHLOMI, WHAT DO YOU MAKE OF SHARES OF SIGMA NOW? GETTING ANNIHILATED TODAY

[User 202507]

shlomi why so QUIET now on sigma you $@#$@()$@$(!($#!#!!!!!...