Exclusive Interview With GSI Technology Management

| About: GSI Technology, (GSIT)
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Conservative 1x rev multiple for legacy chip business and net cash implies no value for MikaMonu; despite $2 million MikaMonu-related R&D spend, GSIT expects to add cash to balance sheet.

Integrated Silicon Solutions was purchased in 2015 for 1.9x rev (comprised of 30% SRAM and lower-powered DRAM business) - applying 1.5x multiple to legacy business equates to $7.35/share.

GM expansion (high-30s at IPO vs 52% last quarter) should continue due to new markets/products; military market was less than 10% of revenue five years ago vs. more than 20% last year.

Parts for aerospace market have $15-20k ASP per part (which costs GSIT hundreds of dollars) vs. current ASP for GSIT of ~$20.

MikaMonu is free VC-like opportunity; INTC recently purchased start-up Nervana Systems for >$400M; potential customers said there is nothing they’ve seen that will touch what GSIT is presenting in search.

Company Description: Founded in 1995, GSI Technology (NASDAQ:GSIT) is a provider of high-performance semiconductor memory solutions to networking, industrial, medical, aerospace and military customers. The company is headquartered in Sunnyvale, CA and is comprised of a legacy chip business that is stable and what we believe is a free option on its associated processing technology – its MikaMonu division - which is part of the machine learning revolution.

Investment Thesis: Summing the company’s net cash balance and a modest valuation for its legacy chip business implies no value for the company’s associative processing technology option. Although the company burned small amounts of cash in recent years, we expect the company to, at a minimum, breakeven in cash this year (even after significant R&D investment in associated processing technology), having settled costly litigation with Cyprus Semiconductor in May 2015. GSI also owns its headquarters in Sunnyvale, CA having purchased it for $6.5 million a few years ago.

Current Valuation:
Shares 21 million @ $4.65/share = $98 million
Net Cash: $59 million (current and year-end estimate)
Enterprise Value: $39 million
Revenue: $53 million (100% from SRAM legacy chip business which is cash-flow positive)

We assign a conservative multiple of 1x revenue to the company’s legacy chip business (comparables are from 1.5x to 2x). Summing the legacy chip business, plus net cash, and a $15 million valuation for MikaMonu, equals $6.50/share. Integrated Silicon Solutions (NASDAQ:ISSI) ($330 million in revenue), was purchased in 2015 for 1.9x revenue and was comprised of 30% SRAM and the balance primarily lower-powered DRAM business. Applying 1.5x legacy revenue equates to $7.35/share. MikaMonu was purchased for effectively $7.5 million in 2015 plus a meaningful earn-out, the present value of which we believe is at least $7.5 million, summing to a current MikaMonu valuation of $15 million. However, Intel’s (NASDAQ:INTC) recent purchase of start-up Nervana Systems (over $400 million) suggests a potentially much greater value to this asset. In our minds, MikaMonu provides free access to a venture-like investing opportunity with the upside to match that asset class.

Key Considerations:

  • MikaMonu’s cutting-edge, patent-protected, associative computing technology is a new computing model moving from serial data processing (where data is moved back and forth from the processor to the memory) to parallel data processing (where computation and search occur directly in the main processing array). GSIT believes Nervana is six to nine months ahead of its own product development. GSIT looks to focus on search where it believes it will be “untouchable.”
  • Amazon (NASDAQ:AMZN) was shown the company’s associative computing capabilities and it was “very impressed” after running multiple simulations. We’ve been told that Amazon would like these chips in hand as soon as possible.
  • GSIT does not expect MikaMonu’s technology to generate revenue until late 2018. In the meantime, however, it is expected that there will be milestone announcements introducing capabilities and applications.
  • The GSIT/MikaMonu idea came to us from a very successful Israeli entrepreneur technologist we’ve known for over 10 years. Insiders own over 30% of GSIT stock. The company did a $25 million tender in August 2014 at $6.50/share.

Disclosure: I am/we are long GSIT.

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