CUBE:Nasdaq) Video is generally expected to be the next broad-brush application of digital technology, adding new dimension to home entertainment, computing, and business communications. At the heart of this emerging business lies the chips which digitally compress and decompress the video images without compromising picture quality. Digital compression enables full-length motion pictures to be crammed onto a 5-inch compact disk complete with multiple soundtracks and alternate versions (e.g. "PG" and "R"), not to mention picture and audio quality that is far superior to VHS tapes.
Ultimately this technology is expected to spawn products that replace the VCR, CD player and camcorder. It enables set-top decoding of satellite broadcasts and will do the same for interactive cable-TV. It is also sure to play a role in the rapidly evolving field of personal and business communications.
C-Cube Microsystems has led the development of digital video technology for consumer electronics. Their systems run complex mathematical algorithms at high speeds to find and remove the redundant elements of video images, allowing for a substantial reduction in the amount of data needed to reproduce high-quality, full-motion video. C-cube dominates the market for encoding systems and is seemingly well-positioned in the promising market for decoder chip-sets.
Wall Street has been drooling over the potential market for digital video technology, but so far consumer products have been painfully slow getting to market and the tremendous hype that was building more than a year ago has lost much of its momentum. 1996 was supposed to be the year of the Digital Video Disk (DVD). Instead, DVD players only trickled out last fall in Japan amid sparse titles to play on the machines, and the same is just now happening in the U.S.
The digital video revolution is turning into a digital video disaster, especially for shareholders of C-Cube. The share price soared as high as $73.50 in early 1996, but it's been hacked back down to the mid-$20s since then. Supporters who think its just a matter of time before DVD skyrockets are engaged in a fierce battle against short-sellers who are targeting the single digits for C-Cube's stock price.
The critics argue that the DVDs are years away from a meaningful presence in the home. This is not to say digital video technology is not compelling in its various applications. Few would argue that it will ultimately send the VCR into retirement. Furthermore, the technology will probably become an integral element of the PC industry in a few years (both hardware and software), and its commercial applications such as professional editing and satellite broadcast are already blossoming nicely.
But for C-Cube, time is money and the DVD time-table keeps getting pushed further into the future. It's is especially important for DVD to catch on quickly because C-Cube is losing market share in its current cash-cow, video compact disk (VCD) players. VCD is a rough predecessor of the DVD technology and the players are popular in Asia, especially China. But rival ESS Technology is stealing market share with a cheaper version, raising another issue of concern - competition.
With the potential market for digital video products coming into view, companies have flooded into to challenge C-Cube's role as leader. The relatively young company is facing seasoned heavyweights like IBM, LSI Logic and SGS-Thomson. Many analysts expect C-Cube to compete favorably, thanks to their early dominance in the technology and alliances with a number of major home electronics makers. They also have used the massive retreat in the share price to make a valuation argument for the stock.
But analysts have recently slashed earnings estimates due to all the delays in the DVD introduction, as well as the loss of market share in VCD sales in China. The mean estimate for 1997 is down to $1.72 from $2.06 a month ago, and '98 estimates were cut by about the same amount. So while the story behind C-Cube and digital video compression remains an exciting one, it has yet to bear the promised fruit, and the short-sellers are having a field day in the meantime.
Transmitted: 3/22/97 1:15 AM |
