|Sigma Designs: Searching For The Bottom|
Posted by Eric Savitz
Sigma Designs (SIGM) shares certainly are having a bad day; but what’s really astonishing is just how much the stock has fallen in the last three months. Since early December, the stock has dropped 70%. This despite the fact that the company remains a dominant chip supplier in both of its key markets: IPTV set-top boxes and Blu-Ray players.
The biggest concern in both cases has been a fear of growing competition. In IPTV, the company has had a near monopoly in chips for the Motorola (MOT) boxes used in AT&T’s U-verse television service, which it has been rolling out aggressively. The stock took a big hit in early January when Broadcom announced that it was being evaluated by Microsoft (MSFT), which makes the IPTV software on which AT&T U-verse is built, as potential competitor for IPTV set-tops. While the company should benefit from the recent news that Blu-Ray has finally knocked out HD-DVD as the industry wide standard for high-def DVDs, it has provided no help for the stock.
Yesterday, the big news was a warning on FY Q1 revenues, which will come in way short due to previous over-ordering by Motorola, which apparently over-estimated the demand for IPTV boxes from AT&T (T). The company said things should normalize later in the year, but investors seem not entirely convinced. The news also raises another obvious question: did Motorola simply produce too many boxes, or is demand or is AT&T rolling out U-verse a little slower than it had expected? Actually, there is another answer, analysts say: AT&T is using Cisco’s (CSCO) Scientific Atlanta unit as a second-source.
N. Quinn Bolton, an analyst at Needham, notes that there are couple of other concerns, as well. One is that gross margin in the fourth quarter fell sharply. Another is that, despite SIGM’s promises, it could take longer than expected to work through the extra box inventory at Motorola. He also says that based on management’s estimates that the overall market this year will be 14 million IPTV STBs and 5 million Blu-Ray players, you get a total addressable market of $342 million. That makes management’s estimate of revenue for the January ‘09 fiscal year of $300 million to $350 million “aggressive,” Bolton says.
Tristan Gerra, an analyst with Robert W. Baird, advises staying out of the stock “until we get more visibility about the timing of a return to normal orders patterns in IPTV, as well as an update on potential new developments regarding the competition landscape.” He cut his target on the stock to $30 from $50.
Other analysts are more optimistic, though most cut targets:
RBC Capital’s Mark Sue cut his target to $30 from $35. He maintains his Outperform rating, but says that “the outlook is not pretty.”
UBS’ Uche Orji keeps his Buy rating, but cuts his target to $48 from $75. He blames the MOT issue on AT&T’s ramp up of Scientific Atlanta set-tops.
Roth Capital’s Jay Srivatsa keeps his Buy rating, but cuts his target to $45 from $58. He says the stock is cheap, with $6.91 a share in cash and no debt, and trading at just 10x FY 2010 estimates.
ThinkEquity’s Anton Wahlman likewise maintains his Buy rating. He snipped his target to $73 from $74. “Fundamentally, the story continues unchanged, in the sense that it keeps getting better and better,” he writes. Hard to believe he is writing about the same stock as everyone else.
Sigma Designs today is down $4.04, or 16%, at $21.22.