Sigma Better Designed for 2009

Just released Sigma Designs (SIGM) Q1 results (see conference call transcript) are probably the worst nightmare for a non-cyclical growth company to shrink both top and bottom lines.  But is this the beginning of the end of SIGM or does this create an opportunity to own a piece of a great company on cheap? 

I think it is the latter.  Their main business - IPTV and Blu-ray HD DVD - will remain sluggish for th remain of 2008, but may have an significant upswing in 2009, benefiting from the next generation IPTV 8654  media processor, which "provides a 50% improvement in performance along with lower overall system costs"; delevering of their new Blu-ray chips and possible Taiwan and China design wins; and many of their initiatives may come to fruits starting the begining of next year as well, leading to potential upside surprises. 

Compared to its strategic competitor Broadcom's  (BRCM) P/E ratio of about 70, SIGM is selling for a meager 8 times earnings or 7 times cash flow. That is too cheap for a growth company.  When SIGM is back to its growth mode again in 2009, it could easily triple its ratios, and needless to say, its stock price.

If Buffet would buy a tech company, I guess he might buy the entire SIGM at this price level, as he did on GEICO and Washington Post (WPO).  But, some other companies (like Cisco (CSCO), Texas Instruments (TXN), NVDIA (NVDA) or Qualcomm (QCOM)) may find SIGM attractive.

Disclosure: Author holds a long position in SIGM

 

Comments

[Seve]

I agree but might add that there are more than a few wild cards out there that could start the acceleration a little sooner--perhaps in the 4th quarter of this fiscal year. One of the big ones is France Telecom. They already have close to 2 million installs and are adding new subs at a quick pace. It appears that Sigma is the winner but the orders have yet to be announced.

The recent announcement that Chunghwa seems to be going toward Microsoft Media Room could be a fairly big positive. The initial arders that have already been talked about appear to be to customers outside of Chunghwa main installed base. But if they swap out their exisitng Linux base, this would be very big and could come on quickly.

I would also strongly recommend that potential investors keep an eye on the new Microsoft Mediaroom wins in Russia. This is a very powerful wildcard for Sigma none of which is in anyones numbers for this year or next!

Longer term, Broadcom is still spinning their IP TV chip and if they don't finish the chip by July August, they could miss all of next year. You can only work on the software after the hardware is done. Each spin fixes some problems and creates new ones--just ask ST Micro. Also, some folks don't realize is that even if Microsoft were to certify the chip tomorrow, they would enforce a 6 month "seasoning" period before letting Broadcom ship it to potential customers. So even if Broadcom completes the chip by September of this year, it is unlikely that they could garner much of an already intrenched market position.

Longer term people are forgetting about Ultra Wideband which could be a huge new leg for the company to stand on. UWB can eliminate the use of all the cables connecting home center devices. Telcos want to use it to transport content over existing Coaxial cables. It will even have applications in cellular devices.

All in all this is a young company (in this iteration) and they will get better at predicting their quarters--a COO and a new ERP system will help. Right now their visibility into ther customers is probably limited.

So the main hurt this year has come from the delay in the completion of their new Blue Ray chip. Once that ships, SIGM will likely regain much of their lost market share as companies like Samsung and Sony would never give business to Panasonic (the current leader in the race) who they view as a major competitor.

Finally with the advent of their next generation cable chip, Sigma will compete against Broadcom in their home court. The new TI solution, though 2 chips will still be a formidible entry in the IP TV over Cable set top business.

Fiscal 2010 could easily be closer to $340MM with a few things going their way and the stock will be rewarded with higher multiple as it still as a growth story!

[Michael Yu]

You brought very good points, with facts and sound logic. At 6.6 times cash flow, the stock is priced in all the known negatives and then some - the fear factor and the short selling factor, which will stage the stock for the perfect storm for good.

If I learned anything from Buffet, it is to evaluate a company as business entity. As a business, SIGM commands lion's share of the IPTV market (about 100% Microsoft based and 75% Linux based), a significant player (about 30% to 40% share) in the Blu-ray market; it is positioned to reap the first-to-market benefit in the new products it has recently announced, as you mentioned in your comments. Its great relationship and working experience with Microsoft and the telcos will make its dominance hard to challenge in the IPTV, Blu-ray and some of the new markets it is entering.

And you don't discount a company that is run by its capable founder. Think of what differences Bill Gates made on MSFT and Michael Dell on Dell. The boss at SIGM has every incentive to make the company great, and that put me at ease at night.

Last but not the least, about 95% of the company's revenue is from outside of US, making it immune from the economic slowdown (or recession, depending on who you ask).

I didn't do my regular DCF analysis, but i know i have a fat margin of safety. Paraphrasing someone once said, a fat guy is unmistakably easy to tell, even you don't know how many pounds he weights.

[GJELOSH197]

MICHAEL, HOW MUCH LOWER IS THIS DAMNED STOCK IN YOUR ESTIMATION GOING TO GO???????????