DSP Group - Great Quarter And Upside Guidance - Why Is This Stock Still At $16?
Summary
- DSP Group reported a strong beat and raise quarter this morning.
- Revenue grew 27% year-over-year and EPS doubled.
- Trading at only 2x sales DSPG is one of the most undervalued semiconductor stocks in the universe.
DSP Group (DSPG) reported a strong quarter this morning with both revenue and EPS above Street consensus. A primer on DSP's business can be found here. Guidance was also well ahead of Street estimates. DSP's growth businesses were up 35% year-over-year in the quarter and up 19% sequentially. As these products carry higher margins than the legacy cordless chips, gross margins came in at an all-time high of 54.1%. These gross margins can expand even further in coming quarters as the growth products become an even larger part of the business and as DSPG leverages its fixed manufacturing costs.
2x sales for a 10%+ grower prospectively is extremely cheap in the semiconductor space. Most peers trade at 4-6x and above. Why does DSPG trade so cheaply? The transition from a cordless phone chip supplier to a broader growing voice IoT chip provider has taken many years and most investors have lost interest somewhere along the road. This is unfortunate as we seem to be at an inflection point of growth with the business growing faster than 20% this year and non-cordless voice IoT making up 70% of the business currently. Not only should revenue growth accelerate over time as higher-growth IoT makes up a bigger % of the business but gross margins should increase as well. I think while many investors (including myself) have had this thesis over the years, I think the size of the company's IoT business today will drive the thesis to fruition going forward.
So what is DSPG really worth? A sum-of-the-parts analysis giving a 1x sales multiple to cordless while giving a 4x sales multiple to the growing other IoT businesses yields a $25 stock price on 2022E revenue numbers or roughly 60% upside from current levels.
What could go wrong with this thesis? If cordless begins to decline rapidly, that will hurt the overall growth picture for the business and could push out the thesis another couple of years. Conversely, if the IoT businesses slow down, that would also hurt overall growth, but I think this would be worse as these are the businesses that we think have most of the value. Given what I see today with voice as an interface gaining momentum, I think DSPG is very well positioned going forward.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of DSPG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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Comments (3)
Great analysis, wish I had gotten in. GL