The embedded software market was featured in Michael Murphy's California Technology Stock Letter last Friday, April 2. Murphy was very bullish on the embedded industry. Murphy noted the overall embedded software market is growing 23% per year.
While telecom/datacom has been the most significant engine of embedded growth, Murphy thought the internet and consumer appliances will be areas of strong new growth for the embedded market. Murphy noted a report from IDC (International Data Corp) looking at internet appliance growth compared to PCs. IDC forecast embedded internet appliances growth a 156% compounded annual growth rate (CAGR) to 518 million units in 2002 while PC internet access units would grow at a 40% CAGR to 126 million units.
Murphy liked both INTS and WIND as leaders in the industry. While Murphy noted INTS had been late to market with pRISM+ and lost momentum over the last couple of years, he said he would be able to meet the new CEO at the upcoming Hambrecht & Quist Conference and “see what they have been up to. If they can get growth back to industry averages, they should have a winner on their hands.”
Murphy liked WIND but with a “Wait to Buy” recommendation. He was concerned that the technical price action indicated WIND could fall as low as $12. Murphy last did a major update on the embedded industry in 1996. While he felt the industry future was very bright, he thought the stocks were too expensive at the time.
The California Technology Stock Letter has a website at CTSL.com.
My own perspective is that while both WIND and INTS should both do well, I do like INTS more here. INTS is still valued at less than half of WIND based on a capitalization to revenues basis. But more importantly, I believe INTS is at the beginning of a new product cycle with pRISM+. INTS has a kept its strong customer base in datacom/telecom (about 45-50% of RTOS sales), consumer and auto markets through its product transition period. They have put together what I see as a treasure chest of embedded technology over the last couple of years acquiring Epilogue (embedded network and internet access products), Diab (Java and C++ compilers), Dr. Design (embedded services), TakeFive (programming tools) as well as several smaller product acquisitions. With a new CEO at the helm, I believe INTS is primed to fully participate in the next wave of growth in the embedded industry.
WIND has been down nearly 5 points to a two-year low on nearly 4 million shares the last 3 trading sessions. There has been no news although analysts have recently pointed to the slowing growth rate at WIND. I have also heard that Tornado 2, which was announced last October, has still not completed beta testing. Possibly WIND is being impacted by product transition issues.
INTS began shipping their pRISM+ 2.0 in February, which they also announced last October. At embedded trade shows I have talked to customers and third-party tools vendors who feel it is much improved over previous versions of pRISM+. INTS also recently announced their corporate agreement with HP which I believe has been WIND's largest customer for several years.
Insiders were buying INTS shares a few months back in the $14-$15 range. Also the company has said they paid as high $13 in the share buyback program last year (they bought back 1.1 million shares). INTS has always been a cash generation machine so I would not be surprised to see them using their cash to buy more at these levels. INTS generated well over $20 million last year and should generate close to $30 million this year. With almost $80 million in the bank, INTS could easily buy the 850,000 shares remaining on their buyback program.
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