Here's an opinion from briefing.com..all very valid points..Check it out!
Another Look at C-Cube Microsystems
Daily commentary updated for May 22, 1997
Company Brief
C-Cube Microsystems (CUBE 26 3/8) is a leading developer of integrated circuits and software that implement international standards for digital images and video. The company's compression technology allows for full-motion video and true-color images to be incorporated into such fast-growing applications as multimedia computing, cable/broadcast television programming and CD-based consumer electronics. The company acquired DiviCom, a leading provider of systems hardware and software for Digital Video Networks (DVN), such as Direct Broadcast Satellite, digital wireless, etc. The acquisition puts C-Cube in the position to provide the most complete system solution for the deployment of DVNs.
More Bad News
A few months ago a negative article in Fortune Magazine led to a sharp sell-off in the stock. Afterwards we questioned many of the conclusions reached by the article, and suggested that risk tolerant investors might want to use additional weakness as a good long-term (re)entry point. But by additional weakness we meant two or three more points, not another 28%. The recent breakdown occurred after the company warned on Tuesday that it would post weaker than expected earnings in the upcoming quarter due to sluggish sales of VideoCDs in China, and to continued pricing pressures from increased competition.
While we anticipated that increased competition from the likes of ESS would result in slightly lower prices for its core VideoCDS products, we expected strong demand and tight cost controls to offset the impact of lower prices. On the plus side, the company attributed the sales slowdown to seasonal factors which it expects will be short-lived. However, the street is in no mood to cut the company any slack given the recent announcement and the stock's poor momentum/relative strength. Consequently, until company proves that revenue growth is back on track and that pricing pressures have abated the stock is likely to remain an underperformer. That said, we have not given up on CUBE's long-term prospects. The company remains an innovative leader in its field and stands positioned to exploit the emerging Digital Video Disk market. The recent setback also leaves the stock trading at compelling valuation levels.
Valuations
At present, C-Cube trades at 11.3x trailing 12 month earnings, a sharp discount to the overall market. Of course, the company's earnings and price instability account for much of this discount. Given the recent announcement, don't look for the market to start assigning the stock a premium going forward. Nevertheless, it should be noted that CUBE trades at 17.4x estimated FY97 earnings of $1.08. Our earnings estimate assumes that the company's actual earnings over the next three quarters fall short of street expectations by 50%. In other words, a worse case scenario. Even using the conservative figures, the stock trades at a slight discount to the market, its industry and its projected long-term growth rate. Assuming an adjustment of the company's projected long-term growth rate from 31% to 25% to reflect the more competitive landscape, the stock trades at 75% of its ltgr.
We aren't saying that the company can't fall further, because it can and probably will. Bearish momentum and a flood of ratings downgrades tend to have a negative short-term impact on the price of a stock. But at these levels, the additional downside risk appears to be limited.
Risks
Increased competition
Margin erosion due to pricing pressures
Renewed strength in the dollar
Rapidly changing technology
Potential for cannibalization of the VideoCD business by DVD.
Market risk
Conclusion
The company's recent announcement that revenues and earnings for the second quarter of FY97 would fall well shy of street estimates will keep the stock on the defensive for the next few months. Bearish momentum also bodes poorly. However, discounted valuations and the company's status as a leader in its industry suggest a brighter long-term outlook. Given that the revenue shortfall appears to be the result of temporary factors and that the company remains well positioned to exploit the emerging DVD marketplace, we expect the stock to stage a rebound. But don't look for a quick recovery, as the current decline has done serious technical damage. Support is in the 17-16 area, while resistance is at 25-27.
MPEG is not any worse off than anybody else...It's a very competitive market and we will have to wait and see who comes out alive...Keep up the research and due-dilly...Tried but true..Don't put all your eggs in one basket...I'll say it again...buy the company not the stock..and then....hang on!.....Don't panic or get too greedy.....Lurk mode off.....
Cheers!
--PS-- |
