Ceva: There Is More To The Story Than Just Apple
Summary
- The stock is running on iPhone 7 and profit taking may be in store, but the story is getting exciting with other long-term growth drivers taking shape.
- Besides iPhone 7, LTE, 5G and Bluetooth 5 in the near-term and vision processing longer-term do promise the continuation of current growth momentum.
- High leverage in the model should help earnings grow faster than the revenue, but deals like Tessera-DTS may re-rate the sector valuation.
There has been a lot of excitement around Ceva (NASDAQ:CEVA) over the past few months; much of the excitement is due of reports and teardown reviews about Apple (AAPL) using Intel's (INTC) chips, based on Ceva's DSP (digital signal processing) cores, in the new iPhone 7. Now that expectations from the new iPhone are slowly watering down, there is a chance that Ceva investors may prefer to take some profit off the table after the decent run, but a closer look suggests the story is clearly more than iPhone 7 and there are decent enough catalysts to sustain the current momentum of 15-20% topline growth and profitability that is boosted by the high leverage visible in a typical IP (intellectual property) vendor business model.
As a small cap, the name may not attract the coverage or institutional ownership reserved for large caps, even though the new smartphone will be a major driver for revenue growth as well as stock. Rich valuation may continue to cast an overshadow on the stock, given the name is trading at more than 30 times next year earnings and 11 times revenue, even though much of the incremental growth flows through to the bottom line. Even though the momentum is great right now, competitive concerns have spoiled the party in the past, e.g. Infineon Wireless losing the iPhone, and Intel's recent purchase of Movidius may raise some doubts again.
These concerns may be worth watching out for, but difficult to see them rocking the boat in the near to medium term. The company has just delivered a 'beat and raise' quarter, with help from high margin royalty revenues coming ahead of expectations, boosting confidence related to the existing products. Yesterday's report of Tessera Tech. (TSRA) buying DTS (DTSI) should not just validate and re-rate the value of IP assets, but also provide a decent floor to the stocks in the space. Some macro tech trends also seem to be working in the company's favor, be it the growth of LTE, where the market share grew more than 3 fold over last one year, growing acceptability of vision technologies or the fast developing Bluetooth 5 standard.
No doubt, Apple is a big deal
The average royalty for the company is around 4.3 cents, which is up more than 50% over last year due to better product mix, and if one goes by the expected 120-130 million units from Apple, it is easy to expect more than $5 million contribution to the topline, significant for a business that is expected to deliver $69 million of revenue for the year. Of course, the opportunity to expand beyond the iPhone is always there.
Story beyond Apple is equally impressive
Even though forgotten right now, the story beyond Apple is equally promising. The royalties are already benefiting from strong LTE unit shipments, up 400% in the latest quarter, and licensing, which is experiencing strong demand from Bluetooth 5 related product designs, should get a further boost from the 10 new licensing deals announced by the company.
The market for vision processing, the demand for which may be driven by the likes of embedded vision, machine learning, autonomous cars, augmented reality devices and virtual reality devices, is just getting developed and Ceva is among the few companies, like Movidius and Cadence (CDNS), which have shown DSP solutions catering to the market. Some of the products and standards that are expected to ramp for the company over the next few quarters are base stations, LTE, 5G and Bluetooth.
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