PMC Sierra Inc. (NASDAQ:PMCS), the designer of communications and storage semiconductors and microprocessors, has run from $6.20 in October to its current level of $13.70. Has the news really been that good? The company now sports a $2.5 billion market cap which is almost nine times sales. News that the company would buy Passave, Inc., which makes system-on-chip semiconductors for the fiber-to-the-home market for $300 million in stock, drove the PMCS stock even higher. Despite the dilution. Industry sources said Passave had $43 million in sales last year.
PMC has said it will do between $85 and $88 million in revenue in Q1. In Q4 05, the company had revenue of $77.6 million and operating income of $12.1 million. For the full-year 2005, revenue was $291 million, a little below the year before. Operating income fell from $37.8 million in 2004 to $21.6 million in 2005, according to Yahoo!Finance.
PMC faces stiff competition from two direct competitors, Applied Micro Circuits Corporation (NASDAQ:AMCC) and Vitesse Semiconductors (NASDAQ:VTSS), according to a recent analysis of the company by Morningstar (www.morningstar.com). And, there are several other companies in who have competing product lines. Just as important, PMC is not a company in the kind of hyper-growth mode that would justify such a sharp run in the stock. Revenue in 2005 was only about $40 million above 2003. And, the $85 million number for Q1 is not a huge jump for the Q4 05 figure.
With significant dilution on the horizon, and a business that has good, but not phenomenal growth, it is hard to see PMC continuing its astonishing six month ride. It's time for a breather.
PMCS 1-yr Chart
Douglas A. McIntyre is the former Editor-in-Chief of Financial World Magazine. He was also the president of Switchboard.com when it was the 10th most visited site on the internet, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc., and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at firstname.lastname@example.org.