Peregrine Semiconductor About To Soar

| About: Peregrine Semiconductor (PSMI)
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Ever pick up your Samsung (OTC:SSNLF) or iPhone and wonder what's inside?

Investors and analysts do, of course. Unless they get and keep other customers, suppliers to Apple (NASDAQ:AAPL) and Samsung live or die on how many smartphones sell in the next quarter, and they worry that some new technology will displace their own. The high tech industry is littered with yesterday's great new ideas.

Here's one smartphone supplier that few know about. It has valuable intellectual property, devices that make iPhones and Galaxy S4 phones work better, and - lo, and behold - other customers as well.

The company we're speaking of is Peregrine Semiconductor (NASDAQ:PSMI).

We've watched it before it went public last August. We've bought and sold shares during the lock-up period, watched with delight as it soared like a peregrine falcon to $19.47 per share on Sept. 14, then in horror as it dove to a low of $8.25 on March 8. Now we sit tight with a few hundred shares, hoping analysts are correct that it's headed somewhere, as in up.

So, what does this company do? Get ready for some alphabet soup to understand Peregrine is to indulge acronyms. We're introduced to a couple just by looking at the Yahoo profile of the company:

"Peregrine designs, develops, markets, and sells radio frequency integrated circuits (RFICs) based on UltraCMOS technology."

RFICs are important in mobile device technology, but they also factor into communications infrastructure, aerospace and defense, and industrial markets. That opens PSMI products to customers besides Apple and Samsung, which some analysts estimate constitute 60-75% of PSMI's business.

"CMOS" is complementary metal-oxide semiconductor, the flesh and bone of PSMI's product line. In simplified language, it is the technology used for several circuits, including highly integrated transceivers for many types of communication.

Peregrine does "ultra" CMOS technologies, which, as the trademarked name suggests, is unique and proprietary. It "enables design, manufacture, and integration of multiple radio frequency, mixed-signal and digital functions on a single chip," according to the company's website. READ MORE

Founded in 1990, PSMI has focused on perfecting silicon on sapphire substrates. While structuring chips on SOS technology for years has been known to have advantages, it also has been difficult to perfect fabrication at competitive cost. In that, Peregrine has succeeded. Its intellectual property includes more than 150 patents so far. Many center on SOS, but not all. Others relate to technology for making CMOS on any substrate.

According to Oppenheimer analysts, PSMI added 161 customers in its third quarter, making its total customer count now in excess of 1,600 worldwide.

To be sure, its biggest customer is Murata, a leading supplier of front-end modules to Apple, Samsung and others. Murata claims its products are present in 65 percent of all smartphones.

In late March, PSMI announced a deal with Murata that should benefit both companies. It will license Murata to serve as a source of RF switches and other components made using Peregrine's UltraCMOS manufacturing process. By licensing Murata, PSMI expands the availability of these circuits.

According to market research from Deutsche Bank, UltraCMOS lets engineers work with "tuning match, self-calibration, closed-loop feedback, reconfigurable bands and modes, and integrated tuning." (DB source information used by permission).

That technology is important to radio frequency engineers who must solve problems related to 4G networks that compete for band and other connectivity standards such as GPS, WIFI and Bluetooth. What's more, it opens doors for continuing refinement of features that will help push smartphone markets ahead.

Competing technologies use gallium arsenide (GaAs) and there is some question as to which technology offers the better solution for performance requirements that newer RF products are demanding.

What new products might emerge with this improved technology? We have wondered how, if at all, the UltraCMOS capabilities will factor into in-development products such as wrist computers. Both Apple and Samsung are said to be developing these devices, and a few other companies (Sony, for example) already have them on the market.

Smartphones, of course, are hugely popular and continue to evolve. According to a March 15 article in the Guardian, Samsung sold 16.8 million devices during Q4 of 2012, second to Apple's 17.7 million. Interestingly, Samsung evidently is not interested in being an Apple "No. 2" like Avis is to Hertz in the car rental arena, but intends to dominate the market. Advanced technology of whatever stripe will be supremely important, and at the moment that points to Peregrine.

Analysts with Oppenheimer have devoted much time understanding the mobile device revolution, including the most recent implications for wireless semiconductor vendors in the "LTE Advanced" world. LTE -- "long-term evolution" - is the "flavor of the month," says Oppenheimer, but "LTE-A drives a growing number of frequency bands and begets design challenges, innovation and ... investment opportunity." (All references to Oppenheimer research are used by permission of Oppenheimer Equity Research).

Put very simply, the new gadgets need increasing band and signal capabilities, and that's forcing RF vendors to sharpen their skills.

And which companies have a edge? Well, according to Oppenheimer, Peregrine is definitely in the running. It's already "the leader in high-end switching for 3G/4G smartphones and tablets," but the brighter future is beyond switches and tuners, in a world where PSMI's "road map and vision is for a fully integrated RF Front End (RFFE) solution."

PSMI, this analyst believes, "will leverage its UltraCMOS technology and leadership position in switching into a successful monolithic front-end solution ... (and) we believe PSMI can become an increasingly large player in the RF front end."

So, all those nice things said, why did the stock take a falcon-like nose dive? There are a couple of probabilities (who could be certain?):

  • In a February conference call to discuss fourth quarter and 2012 full-year results, PSMI Chairman, President and CEO Jim Cable lowered the company's Q1 revenue projection to the $40 to $43 million range. Analysts had been looking for something in the $58 million range, and shares fell dramatically in the next few days. Oppenheimer quickly added insult by downgrading to "perform," and suggested that PSMI might be losing business with Apple to much-larger Skyworks Solutions (NASDAQ:SWKS).
  • The "lock-up" requirement for the Aug. 6 IPO expired Feb. 10. For the first time, pre-IPO share holders could trade their shares, and volumes increased, on some days quite dramatically. Much of the lock-up activity probably has run its course, and the stock in recent weeks has been trending up from its 52-week low.
  • There are competitors - surprise, surprise! Among them are RF Micro Devices (RFMD), Skyworks , Avago Technologies and Triquint Semiconductor. And don't forget the really big player - Qualcomm (NASDAQ:QCOM)!

Peregrine is in a legal dispute with RF Micro Devices, alleging patent infringement. Cost of fighting the legal battle is significant, of course, but the outcome may or may not be worth the price of doing battle. Intellectual property in this arena is everything, so Peregrine probably has little choice but to protect its property.

Recent share activity has improved. Closing price at the end of March was $9.77. Offering price last August was $14. Basis cost for pre-IPO share holders is about $11. Deutsche Bank rates the stock a "buy." Yahoo Finance analysts rate it a 2.1, with 1.0 being a strong buy and 5.0 being a strong sell.

Earnings per share have been improving, and price as a factor of earnings is attractive at a mid-March price of $9.36:

EPS Diluted
Q1 Q2 Q3 Q4 Yr Multi
2011A (0.01) (0.02) (0.16) (0.07) (0.26) N/M
2012A (0.08) 0.04 0.17 0.19 0.39 24.6x
2013E (0.01) 0.05 0.10 0.11 0.25 38.4x
2014E 0.03 0.09 0.19 0.19 0.50 19.2x

Source: Oppenheimer Equity Research (by permission)

Market Data

52-week range $19.47-$8.25
Shares Outstanding 36.5M
Float 6.2M
Market Capitalization $305.9M
Avg. Daily Trading Volume 140,803
Dividend/Dividend Yield N/A
Book Value $3.26
Fiscal Year Ends December
Estimated 2013 Return on Equity 23.3%
Long-term debt $0.0M
Preferred N/A
Common Equity $119M
Convertible Available? No
Source: Oppenheimer Research (by permission)

What should you do?

Deutsche Bank, after a mid-March meeting with management, issued a "buy" rating on the stock, and as I write this, PSMI has increased in price to right at $10. DB gives it a price target of $15 a share, noting that with its product "so much can be manipulated in order to easily have aspects like tuning match, self-calibration, close loop feedback, reconfigurable bands and modes and integrated tuning -- aspects that analogue could never do. While performance between CMOS and Gallium Arsenide (GaAs) seems similar now, these other areas will become more and more important with time."

I intend to see how first quarter sales go, see what happens with the new Samsung Galaxy S4, and ferret out what I can from Internet and analyst sources about PSMI technologies, in smartphones, sure, but in other products as well. Because I already own a few hundred shares, I'm hopeful the price at least returns to my cost, but I'm also very seriously considering adding to my holdings. Who knows what's on the horizon for popular consumer products that may depend on UltraCMOS advantages?

Conclusion: In the world of high technology, hot can become cold in a hurry. At the same time, PSMI has valuable, patented technology, and its products are going into a variety of devices. It appears well positioned to accommodate the rush for LTE-A applications, which analysts think is the next product phase. All of this may change, but it's a reasonable prediction that for the foreseeable future, Peregrine Semiconductor fortunes will soar.

Disclosure: I am long PSMI. 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.

Additional disclosure: Please note that the information presented here is not the work of licensed financial adviser or experienced investment professional. Information provided should never be construed as investment advice. It is for educational and informational purposes only, and constitutes the elements of a personal learning project. Before buying or selling a security, you should do your own research and reach your own conclusions, and/or seek the advice of a professional certified financial adviser.