Well, there are just some things that don't seem to make sense at first glance in this market. LSI (NASDAQ:LSI-OLD), a fabless semiconductor company that specializes in storage and networking products, reported a pretty ho-hum Q3, coming in at $624M in revenues against a guided range of $620M - $660M and analyst expectations of $638M. Non-GAAP earnings per share came in at $0.17, in-line with analyst expectations.
Guidance was also pretty weak; the street had been modeling $645M in revenues for the quarter but was treated to a guidance of $570M - $610M. On the earnings front, the analyst estimates for the current quarter were $0.14 - $0.21 per share, while the guidance calls for $0.11 - $0.17 (non-GAAP).
Given these disappointing results, it seems fairly perplexing that shares of the company rallied strongly in the 10/25 session closing nearly 8% up from the previous day. What happened?
1. Expectations Were Very Low
Marvell (NASDAQ:MRVL), LSI's main competitor, pre-announced a revenue miss primarily due to weakness in storage (in particular thanks to weak PC sales). While this was certainly bad news, weak PC sales results from the major vendors such as HP (NYSE:HPQ) and Dell (NASDAQ:DELL), coupled with the tepid guidance issued by Western Digital (NYSE:WDC), made these results completely within reason.
In fact, shares of the company seemed to have this baked in already as they have been trading significantly off of their April and September highs, even after the post-earnings bounce.
2. LSI Going Full Force Into Flash
While the low-expectations on the broad financial metric side likely drove some short covering, the real kicker is that it is much more openly aggressive about becoming a significant player in the flash storage arena. While Marvell certainly offers solid state drive controller technology, LSI very aggressively bought into the space via its acquisition of SandForce.
The company not only provides system-on-chip products to the consumer SSD vendors such as Intel (NASDAQ:INTC), OCZ Technology Group (NASDAQ:OCZ), and SanDisk (SNDK), but also aims at the very high margin, fast growing PCIe flash adapter space. For the enterprise, this is a space that the company believes will grow at a 31% CAGR until at least 2015. Wall Street shares LSI's view. How do we know?
Fusion-io (NYSE:FIO) is a darling of Wall Street. The stock still has price targets that range from $35 - $50 from multiple sell-side firms. The growth in the PCIe flash accelerator is undeniable, especially as Fusion-io has posted high double-digit revenue growth coupled with excellent margins very consistently, unlike competitors OCZ Technology Group or STEC (NASDAQ:STEC).
What makes LSI so formidable here is that not only does it provide similar PCIe accelerator/caching solutions as Fusion-io (albeit with a less sophisticated software stack at the moment), but it also can leverage quite a bit of its general storage and networking portfolios to provide very complete solutions to data-centers.
3. Revenue Growth Still Strong
The reason that LSI bounced and Marvell is sagging into even more bargain-bin valuations (50% of its market cap is in cash) is that LSI is still a growth story. Despite coming in at the low end of estimates, LSI grew revenues by 14% y/y and even with its very tepid guidance of $570M - $610M, this still represents 13% y/y growth for the quarter at the midpoint.
Despite missing sell-side estimates for Q3 and Q4, LSI is still growing sales at double-digit rates while maintaining healthy margins (52-54% GMs guided for Q4 - flat from Q3). The company is well positioned to take advantage of the next generation storage technologies in both traditional hard disk drives as well as flash solutions in both consumer and enterprise realms.
Disclosure: I am long MRVL, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.