Mosaid delivers above and beyond consensus call
by Bob Beaty November 24, 2000
As companies fall all over themselves to warn analysts and investors about what seems to be
the next 20-minute interval of their corporate earnings and revenue progress, those few and
far between upside corporate earning surprises tend to stand out.
Such was the case Tuesday as Ottawa-based semiconductor designer Mosaid
Technologies (TSE:MSD) delivered second-quarter 2001 earnings (as at Oct. 31) of
C$0.18, besting First Call consensus of C$0.11 per share. Second-quarter revenues were
also robust at C$18.8 million vs. C$11.6 million for the same quarter 2000. But earnings
were the real story: that C$0.18 number was a full 250 percent improvement over the C$0.07
cents earned in the second quarter of 2000. Even though the company has delivered nine
consecutive growth quarters, investors have to be impressed.
As we mentioned in July, when the stock was C$55, Mosaid has nearly 100 intellectual
property design patents and a like number pending. (See "Hitachi deal unlocks Mosaid's
hidden value.")
Swept along with other semiconductor stocks as investors fled like lemmings, Mosaid is
currently trading at a more attractive level in the low- to mid-C$30's.
Patented technology
The company believes that the 20-plus companies that produce DRAM chips use at least
partial Mosaid-patented technology. Mosaid reviews the technology, determines if its
technology is included in a product and, if it is, approaches that company to arrange a
license.
Among those who have licensed the technology are Hitachi (HIT), Fujitsu, NEC (NIPNY)
and Toshiba, and Mosaid is currently in negotiations with nine other companies. Mosaid has
an aggressive R&D program to continue to develop patentable technology. The numbers are
evidence that the approach is working in spades.
The likeliest comparison to Mosaid is Rambus (RMBS). The forecast earnings numbers,
however, leave little doubt as to which is the more reasonably priced.
First Call forecasts C$0.52 cents for fiscal 2001 for Mosaid, representing a price/earnings
ratio, at C$33, of 55 times. Rambus is forecast to earn US$0.55 cents. Against a current
US$50 share price, its price/earnings ratio is significantly higher, north of 90 times. Mosaid,
with a market cap of C$300 million, is significantly smaller -- and perhaps more nimble than
Rambus -- which has a US$5 billion market cap. For those who like price-to-sales numbers,
Mosaid's price-to-sales ratio of 10 times is certainly more appealing than Rambus' 50-plus
multiple.
Analysts like it
Analysts, too, like the stock. In his October report, Valentine Lee, Technology analyst at
HSBC Securities in Toronto, raised his 2001 earnings number for Mosaid from C$0.49 to
C$0.61 cents per share and his price target for Mosaid from C$76 to C$106. He forecasts
C$0.90 cents for fiscal 2002.
Lee particularly likes the growth of Mosaid's systems division, which designs and produces
automatic testing equipment for memory design and quality. The division provides a
complementary offset to the vagaries of the semiconductor division, which, while robust and
growing, is not immune to that sector's predisposition to volatility.
Mosaid just introduced its new MS4205 tester and has already seen significant demand; one
was sold before its official launch. Lee notes that there could be a slight "hiccup" in sales as
the old tester inventory is cleared away. But large clients such as Samsung have multiyear,
multitester orders that should quickly soak up the supply.
Mosaid's share price has suffered in lockstep with the semiconductor sector. As we
mentioned in July, the then run-up the stock experienced that drove it from C$16 to C$62
was unsustainable; that gap was likely to get filled in. The shares have given back almost 50
percent since then.
Attractive but risky
Nevertheless, Mosaid's recent earnings numbers and more rational valuations should attract
investors' attention. Mosaid has a strong pipeline of potential licensing deals and while those
licenses are not assured, future successes will sustain growth well into 2003. The Systems
division also looks to have significant prospects and any inventory buildup of older product
appears not to be a worry.
Mosaid's niche is unique, as it is a combination of designer and licensor of semiconductor
intellectual property. The neat part is that as it uses its aggressive R&D to produce new
patents and fatten its portfolio, it basically creates its own prospects. There is no way to
quantify the value of that patent portfolio, but as more licenses are secured, it becomes
apparent that both the value and the prospects are significant.
While Mosaid shares are not for the faint of heart, the almost self-fulfilling nature of Mosaid's
business adds a compelling dimension for investors willing to take the risks inherent in the
semiconductor space.
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