CUBE featured on todays AOL personal finance board.........
Divicom Seen as Key Growth Driver
C-Cube Microsystems (Nasdaq:CUBE) is often referred to as a maker of chips for DVD players. While this is true, it falls well short of representing C-Cube's overall business. In fact, a much larger chunk comes from the Divicom unit which deploys digital video networks for satellite (DBS), broadcast and cable companies. Divicom's system sales are growing rapidly as the markets for digital cable, satellite and digital broadcast are in their very early stages.
DVD is still an important end market for C-Cube's MPEG decoder chips, but at this point it represents a rather small part (around 10%) of the companies overall revenues. DVD, short for Digital Video Disc, is heralded as the next generation of consumer home entertainment to replace videotapes. C-Cube's integrated circuits encode and decode the digital signals in DVD players as well as VideoCD systems. VideoCD, which accounts for roughly 25% of C-Cube's revenues, is largely an Asian phenomenon with the largest market in China for karaoke systems. C-Cube's silicon division struggled last year due to a combination of softening sales in the VideoCD market and a slower-than-expected adoption rate for DVD.
Another area that is small but growing quickly is set-top decoders for DBS, cable and phone company services. This segment should account for another 10% of C-Cube's sales this year, slightly more than the DVD chip business.
The DVD and set-top box markets should take off over the next few years, but the current engine of growth is its Divicom division. Divicom makes systems that compress, transmit and receive large quantities of digital audio and video data. These systems are sold to customers such as DirectTV, EchoStar, BellSouth and US West. Divicom won cable head-end encoder contracts with Time Warner and MediaOne this year, and on Monday it was selected to build China's first direct broadcast satellite system. Divicom accounts for over 40% of revenues, and the division is expected to grow at a 35%-40% clip for the next several years.
All this is not to suggest DVD is insignificant to the fortunes of C-Cube. Indeed, it holds promise as a major new force in home entertainment and could contribute significantly to C-Cube's growth a few years down the road. But investors should realize that there is much more to C-Cube's business than DVD, and the near-term fortunes of the company are likely to be driven more by C-Cube's Divicom division than anything else.
Market jitters have shaved $10 off its price in the past month, but the stock is still up about 34% since we profiled it in March. This is a volatile stock with a beta of 1.47, so it's not for the faint-of-heart and could be especially dangerous if the recent market weakness turns into something worse. Wall Street seems to like it, though, with eight of nine analysts rating it at least a Buy. Analysts are forecasting a 24% growth rate in earnings per share over the next five years, though only 15% this year.
At $27.81 currently, C-Cube is trading at a P/E of 23.6 using trailing 12-month earnings. The forward P/E (based on consensus earnings estimates) is 22.1 for 1999 and 18.9 for 2000. That's slightly less than the average for S&P 500 companies, 26.9 times 1999 estimates, and well below the chip industry average of 60.5.
If C-Cube can live up to the long-term growth expectations and perhaps get investors to recognize it as more than just a DVD story, there would seem to be further room for expansion in its P/E multiple. There's also been occasional takeover speculation this year, but that's not the sort of thing long-term investors should hang their hat on.
- James Hale
8/9/99 10:11 PM |
