This ad for Jim Fink’s Roadrunner Stocks isn’t brand new, a very similar ad was circulating last year… but the company teased then doesn’t exist anymore, and the spiel has changed a little bit, so we’re going to take a fresh look at it.
The ad starts, as so many do, with a promise that there’s a “insiders only” battle brewing in some technology marketplace … but they say that they’ve picked the stock that will win no matter who ends up victorious.
Here’s the opening, which will probably sound familiar to those of you who’ve been with Stock Gumshoe for a while:
“There’s a battle raging in the fast-moving world of Silicon Valley. Like VHS tapes snuffed out Betamax… and CDs killed cassettes… the winner of a new “gold standard” for data is about to be crowned.
“I’ve discovered a tiny company that figured out a way to make money from this new $10 billion market—no matter who comes out the winner.
“Here’s how to get your share of the profits….
“It’s so advanced that it already counts industry titans like Google as customers. And thanks to its recent acquisition, it nearly doubled the company’s profitability in one fell swoop.
“Its long-term prospects have never been better. Don’t let this profitable opportunity pass you by!”
Sounds A-OK, right? The basic spiel is that this company is riding the “Internet of Things” wave, the increasing interconnectedness of all things… and that’s certainly a trend that’s really happening, though we’re a ways off from knowing if it will be super-profitable for any one company in particular, or create any fantastic new companies.
And we’re told that there’s a “data battle” going on — we’re told that while the Internet of Things will be a huge user of data, and will require better and better wireless networks, that the latest technology to let these machines communicate to each other, using the 60 GHz frequency, is unsettled… there’s no one standard yet that everyone is adhering to:
“The technology driving this growth makes it possible to transfer data 18 times faster than Wi-Fi.
“Imagine being able to transfer 1,000 pictures in five seconds… or downloading a movie to your tablet in three minutes!
“That’s what this technology does.
“It operates on a totally different frequency (60 GHz) than Wi-Fi, and it’s impressive.
“We don’t need to bother with the technical details here. But suffice it to say, its goal isn’t to replace Wi-Fi but rather to supercharge it.
“And it does a tremendous job.
“So much so that 1.5 billion more devices will use this technology by 2018….
“First, though, a major problem needs to be solved.
“There’s no ‘gold standard’ for this frequency.
“And that’s set up a battle between two powerful groups. Each is vying to be the winner in this $10 billion market.
“This showdown has created a massive opportunity for one small company I’ll show you in just a minute.”
So who are the participants in this “standards war?” Here’s Fink’s explanation:
“The Turf War for High-Speed Data Supremacy
“Just as VHS tapes snuffed out Betamax… and CDs killed cassettes… there’s a new turf war taking place for high-speed data supremacy.
“On one side is the WiGig Alliance.
“Members of this group include industry giants like Qualcomm and Microsoft.
“Qualcomm believes so much in WiGig’s future that it paid 30 times sales to buy a company leading the charge in its development.
“On the other side of the battle is the WirelessHD Consortium. It boasts members like Panasonic, Samsung, Sony and Toshiba.”
And then we get into some more of the actual clues to help us ID the stock being teased:
“Investing in suppliers isn’t just a lower-risk approach than trying to choose the clear winner in any market—it’s a time-tested strategy that can make you rich.
“And the company I’m going to tell you about now is set to become the next big, unknown pick-and-shovel winner. And it’s still less than $8 a share! …
“It’s a tiny company that’s so advanced that it already counts industry titans like Google as customers.
“And just recently it agreed to buy the company that leads the market in high-speed data connectivity—with over 500 patents in three major product areas.
“When it did, it doubled its revenue from consumer products literally overnight….
“I’m 100% sure that if you’re reading this on a laptop or desktop computer, you have a piece of this company’s technology.
“And you’re using one of its products every time you fire up your flat-screen TV, too.
“What’s more, nearly a billion mid-range smartphones in China and India use this company’s technology for data connections.”
So what’s the downside, or why is the stock below $8 if it’s so fantastic? Here’s how the ad puts it:
“The sad truth is most analysts don’t see them as a major player.
“Especially in 60-GHz data where they’re throwing around names like Qualcomm, Intel, Microsoft and Dell.
“Plus, many feel WiGig will come out the winner.
“And since this little-known player has a strong presence in the WirelessHD Consortium, it’s dismissed as an also-ran almost immediately.
“But here’s what everyone is missing.
“This company is a player on both sides of the standards battle.
“In fact, it’s about to roll out its own WiGig product any day.”
And one final clue for you:
“Its CEO was recently quoted as saying, ‘Our goal is growth, to grow [the company] into a $1 billion company over time.’ And thanks to its newest purchase, it could happen far sooner than anyone thinks.”
So who is it?
One more tidbit for you:
“… the tiny genius I’ve just showed you is trading not far from its 52-week low—$6.35 a share—which makes it a flat-out bargain.
“But not for long.
“Its full-year revenue was up 10.1%—and that’s before the recent acquisition.
“As word of its WiGig product leaks out, and when the bigwig analysts connect all the dots and realize that it silently doubled its consumer-products revenue overnight, you can rest assured that there’ll be a flat-out rush to get in.
“In the short term, it’s an easy double.”
Well, yes, it turns out that the Thinkolator’s answer is still the same on this one — and it has destroyed quite a bit of value on the nine months or so since Fink started touting the stock. When he first started running a teaser ad very similar to this, back in December, the tease was for Silicon Image (SIMG). That didn’t work out spectacularly well, though it might have been possible to turn a profit if you bought at the right time, Silicon Image announced in January that they were agreeing to be taken over by Lattice Semiconductor (LSCC), the takeover was for $7.30 cash per share and it went through in the Spring.
And Silicon Image shareholders have been, no doubt, celebrating the fact that it was a cash deal — if they had gotten Lattice Semiconductor shares in exchange, they’d be down at least 30% or so. LSCC peaked at about $7.30 on the announcement, and has been mostly down in a very gradual decline since then… the as hasn’t been updated to accompany the last couple months of falling share price, it hasn’t seen $6.35 a share since late June, and today you can buy Lattice, if you so choose, for less than $4 a share (it’s at $3.98 as of Tuesday’s close).
So… is it worth a look at this price? They are in a very competitive space, as are most semiconductor companies — they are quite focused on selling communication chips into consumer electronics, including TVs and mobile phones, so they have to “win” their way into the designs at the manufacturers of these devices and hope that the product achieves high sales volume so they can sell more and more chips. They do have some very cool sounding technologies, like a wireless solution for HDMI (getting rid of that HDMI cord for your HDTV), and other wireless communication technologies that are indeed based on that 60 GHz bandwidth.
But they are certainly in a soft patch, and they aren’t profitable. It’s true that they’re trying to grow, and that quote from the CEO about becoming a billion-dollar company is accurate (it’s from one of their conference calls about a year ago) — that’s why they bought Silicon Image, to speed up their growth in consumer products and, well, to buy some growth. Unfortunately, SIMG wasn’t growing that fast at the time, either, since they’ve also been looking for that next catalyst to drive shares — for SIMG, the most likely one is the next upgrade cycle of televisions, and that doesn’t seem to be speeding up particularly dramatically. TV makers have been trying to spark another upgrade cycle since the huge upgrade cycle of the mid-2000s, when everyone got a flat screen TV in order to get HD, a flat form factor, and compatibility with digital signals while analog television was being phased out by the FCC… but it hasn’t happened. No one bit on 3D TV, which was the great hope a couple years ago, so now the dream is that 4K or “Ultra HD” will be impressive enough to get everyone to replace their HDTVs. Maybe it will be, but it’s not happening all at once.
And Lattice has also had some trouble in China, it seem to me from reviewing their recent results (and their last conference call transcript) — not because they’re not getting design wins in mobile, but because the products they’re being designed into haven’t gotten to scale… so they’ve won some designs, but some of the products they’ve “won” slots in haven’t themselves been winners in the consumer marketplace. Meanwhile, a lot of their revenue comes from fairly low priced parts, like USB chips, where there’s even more competition than there is in wireless…. So while they do have some revenue growth, even before the Silicon Image transaction, it’s not very aggressive growth… and there hasn’t been any earnings growth to speak of.
Analysts hope there will be some earnings growth in the future, but they’ve pushed that profitable hope further out now — since the merger was announced, estimates have been coming down for Lattice… particularly for this year, with some softness in revenues last quarter and in this current quarter, but also for next year. Now, analysts forecast that LSCC will earn five cents a share this year (a month or two ago that number was 36 cents per share) and 57 cents per share in 2016 (down from the prior estimate of 70 cents). So if you think analysts have a chance of being right about 2016, which itself will probably be back-loaded because the company has been talking about their newer growth products getting traction in 2016, then the stock is trading at a forward PE of about 7. That’s quite a bit cheaper than (much) larger competitors like Altera (ALTR) and Xilinx (XLNX), both of whom have also seen their forecast earnings dropping for this year and next year, but I don’t think there’s any particular reason to have a lot of faith in the analyst forecasts for LSCC — they’ve been way off so far, and the company is in the middle of integrating a huge acquisition.
So… is it the “best tech stock under 8?” Or, now, the “best tech stock under $4?” I don’t see anything that makes me want to jump up and down with delight — it’s tough to win with investing in small semiconductor companies unless you understand the business and their prospects really well, so perhaps that’s the case with Jim Fink and he’s just a bit early in anticipating the revenue potential of 60GHz networks and the “Internet of Things”, but I don’t see anything in LSCC’s materials that makes me think they’re uniquely addressing needs or getting design wins that the larger chipmakers can’t. Either that’s a failure of imagination on my part, or I don’t understand the business well enough, or Lattice is a small also-ran in this space and unlikely to be able to grow revenue without hurting their margins.
Maybe it’s the market gyrations of the last few days making me a bit extra-cynical, but I’ve been burned by little semiconductor companies before… without a dominant market position and/or a strong brand name, it’s a very tough business with pricing pressure and competition around every corner. Sometimes that works extremely well, like when a little guy like Skyworks Solutions develops a better, cheaper, lower-power solution and gets design wins and profitable pricing from makers of a hot product (like the iPhone) that generates huge revenue growth, and keeps the ball rolling by keeping their technology a bit ahead of the competition, but it seems to me that the stars have to align pretty nicely for that to happen. Silicon Image does have a brand and a pretty strong niche that might help LSCC to grow better than expected… and LSCC does have one strong argument in their favor: their stock is beaten down now, and if Fink is right then their 60 GHz opportunity is misunderstood… but other than that, it’s hard for me to get excited. If you’ve got thoughts to share on Lattice, feel free to shout ’em out with a comment below.