Re: reminds me of the good old days when an investor could really find undervalued stocks using traditional metrics.
SSTI---Hypergrowth at a Bargain Price
SST is still firing on all cylinders. Three days ago the company pre announced third quarter earnings and revenue growth that exceed 45% on a sequential quarter basis.
The company expects to report third quarter revenue of greater than $150 million, or an increase of greater than 45 percent over the second quarter of 2000 and greater than 325 percent over the third quarter a year ago. In addition, the company expects to report earnings per share for the third quarter of 2000 to be greater than $0.35.
biz.yahoo.com
The more I find out about SST, the more I like the company. A preliminary, mini hunt report follows:
1. Open Proprietary Architecture. There is no question SST has a well received open proprietary architecture based on its patented Superflash technology. SST has patented both the production process of Superflash as well as the end Superflash product. SST offers its SuperFlash technology for embedded applications through its world-class manufacturing partners and technology licensees such as Apacer, Analog Devices, ATMI, IBM, ISD, National Semiconductor, Motorola, Samsung Electronics Co. Ltd., SANYO Electric Co., Ltd., Seiko Epson Corp., TSMC-Acer Semiconductor Manufacturing Co. (TASMC) and Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC).
2. More on Superflash. SST's SuperFlash technology is a NOR type, split-gate cell architecture which uses a reliable thick-oxide process with fewer manufacturing steps resulting in a low-cost, nonvolatile memory solution with excellent data retention and higher reliability. Superflash also has advantages in supporting low-power consumption and the ability to shrink feature sizes with new processes.
3. Superflash is Scalable. There have been questions as to what SST will do for an encore should low density flash requirements move up to higher densities. I have called the SST CFO about this issue, and was told in no uncertain terms that Superflash is scalable. SST management has consistently maintained the position that Superflash will maintain its advantages as die sizes shrink and low densities move up.
4. Superflash is Leveragable. SST is leveraging Superflash in to a wide array of products. SST offers over 50 products based on the SuperFlash design and manufacturing process technology. Here is SST's latest product announcement:
SST Targets New Dual-Bank Flash Memory Device for Embedded Applications in Internet-Ready Mobile Phones and PDAs
biz.yahoo.com
Here is an earlier example of SST leveraging Superflash in to a more complex product:
siliconinvestor.com
5. Discontinuous Innovation. Superflash technology may not meet a rigorous definition of a discontinuous innovation. It could be argued that the technology is a significant continuous innovation--- a la Juniper's router. Regardless of where one places Superflash on the continuum from continuous to discontinuous innovation, I still believe SSTI is a compelling investment opportunity.
6. Target Market. Although SST's market used to be primarily PC BIOS, now their target market is all smart devices with embedded technology. As a Wind River shareholder, I have an appreciation for the enormous potential of the embedded technology market.
7. First Mover Advantage. SST does not appear to have much competition in its core business---embedded low density code storage. This is a low margin business for most flash producers, but it is a high margin business for SST because of the cost advantage inherent in producing Superflash products. SST is the leader in this space.
8. Industry Standard. SSTI has a very good shot at becoming the industry standard for low density code storage.
9. High Switching Costs. In so much as OEM's design Superflash patented production technology in to their production processes, the switching costs may be high. However, I am not certain how best to evaluate the switching cost issue at this time.
10. Strong Value Chain. In addition to the manufacturing partners and technology licensees named in #1 above, the following information is available: In digital consumer products, SST provides memory components for consumer companies including Canon, Datel, Freetron, GSL, IDT, Panasonic, Sanyo, Samsung, Siemens, Sony, TiVo and Xerox. In networking, SST provides memory components for 3Com, Cisco, E-tech, Intel, Lucent, Nortel and Xircom. In wireless communications, SST provides products for companies including Kirks, Lucent, Maxon, QCOM, RTX, Siemens and VTech. In Internet computing, SST provides a wide array of memory components for companies including Acer, Apple, Asustek, Compal, Compaq, Dell, FIC, Gigabyte, Mitac, NEC and Quanta. Other customers include Arima, Diamond Multimedia, Infineon, Inventec, Lg and Liteon.
SST's products are manufactured at leading wafer foundries and semiconductor manufacturers including Samsung Electronics, Sanyo, Seiko-Epson, TSMC and UMC. SST also works with IBM, Samsung Electronics, Sanyo, Seiko-Epson and TSMC to develop new technology for manufacturing SST products.
11. Barriers to Entry. SST's biggest barrier to entry is its superior proprietary Superflash technology. If another company can design a lower cost solution with a smaller footprint, lower power consumption and higher reliability, it could supplant SST's Superflash technology. I am not aware that any company has designed such a solution, although I am aware of one competing company that makes grandiose claims with little or no market share in SST's space to back up the claim.
12. Royalties. SST received a number of one time up front license fees in 1999. These high one time up front fees in 1999 made last quarter's y/y quarterly comparisons look weak. The run time royalties from these license agreements are just now beginning to ramp up and I expect SST's sequential quarterly license revenues will steadily improve. SST licenses SuperFlash technology to leading semiconductor companies including Analog Devices, ATMI, IBM, ISD, Motorola, National Semiconductor, Samsung, Sanyo, Seiko-Epson and TSMC to embed in semiconductor devices that integrate flash memory with other functions on a single chip.
13. Competition. I am still trying to figure out who the competition is. It seems like everyone went to higher density products and left SST alone---at least for very low density code storage. For some of SST's products that involve higher nand flash densities, there is lots of competition.
14. Tornado. SST is in a tornado in just about every imaginable way an investor could elect to measure a tornado. Trailing twelve month growth in both earnings and revenues, forward twelve month growth in both earnings and revenues, and the growth in the embedded applications market all meet the tornado growth definition.
15. Valuation: If third quarter earnings come in at 35 cents per share, at today's price, SSTI will be only selling at 36 times trailing earnings. If SSTI meets CY 2001 consensus earnings estimates of $1.76 per share, which are likely to be raised following this earnings pre announcement, at today's price, SSTI is only selling at 15 times CY 2001 earnings.
SST is expected to have over 1 billion in sales next year. At today's price SST is only selling at a 2.4 PSR on next year's sales.
If anyone can find any other hi tech companies with widely adopted proprietary technology growing at triple digit rates and selling at low forward multiples like this, I would like to hear about them. Please PM me the info.
Best, Huey
Disclaimer: The above represents my DD on SST at this point in time. Although I have taken a position in SST, I plan to continue on with more SST DD. Please do your own DD before investing! |
