Some positive comments on GSPN From RedHerring.com:
redherring.com
Let the chips rise where they may
By J.P. Vicente
Redherring.com, November 30, 2000
Only four months ago, Internet broadband access stocks sold like
hotcakes. Today, investors are dumping them as if they were hot
potatoes. What gives?
DSL providers like Covad Communications (Nasdaq: COVD) and
Northpoint Communications (Nasdaq: NPNT) have staged a
dramatic free-fall in the past few months. The truth, however, is that
the near demise of those companies has created plenty of confusion
about the broadband market as a whole, prompting many investors to
dump solid stocks on unfounded fears.
Our take? Chip and integrated circuit (IC) makers like Globespan (Nasdaq: GSPN), Applied Micro Circuits
(Nasdaq: AMCC), Broadcom (Nasdaq: BRCM), and PMC-Sierra (Nasdaq: PMCS), which make the microchips
and ICs that go into the telecom firms' data-center equipment and your cable or DSL modem, are relatively safe
bets, and you'd probably make money in the long run if you buy them at current levels.
Let's get one thing straight: high-speed Internet access -- be it in the form of cable modems, DSL, or some variation
of wireless broadband -- is here to stay. Morgan Stanley Dean Witter predicts that the overall number of Internet
users will jump from 126 million in 1998 to more than 500 million in 2003, with bandwidth-intensive applications like
e-commerce and streaming audio and video being the driving forces for high-speed Internet access. And according
to a recent study by Cahners In-Stat Group, revenue from broadband subscribers will balloon from just over $1 billion
in 1999 to $13.3 billion in the next four years.
But investors need to be selective. The market, as it stands today, is overpopulated. And although broadband
penetration will grow, the number of players will most likely shrink rather than expand. This is especially the case for
the service providers that bring high-speed Internet access to the home or office.
To find which stocks deserve an honorable place in your portfolio, one needs to understand how this market is
divided, and how the main players are positioning themselves to face stiff, entrenched competition.
BUY THE CHIPS ON THE DIPS We believe that the chip companies are the best investment bets right now for
several reasons. Competition on that end of the market is not as stiff as it is among ISPs; most of the companies
have been cash flow and earnings positive for quite some time; their revenue growth has, in most cases, beaten that
of their service provider counterparts; they have good cash positions; and, last but not least, at current prices, most of
the companies are oversold.
Many of the communications chip stocks have been hit hard by a widespread tech sell-off on fears that growth for
semiconductor firms in general will slow down over the next 12 months. Globespan, Broadcom, Applied Micro, and
PMC-Sierra have dropped an average of 62.2 percent in the last two months.
"That's a misconception," says Morgan Stanley Dean Witter analyst Louis Gerhardy. "Those firms have been lumped
together with other semiconductor firms and some broadband service providers, even though they shouldn't have
been."
Mr. Gerhardy has a point. Since broadband is currently the fastest growing segment in the semiconductor business,
companies operating in that market will likely be the least affected by a slowdown in revenues in 2001 due to an
expected reduction in corporate capital spending. "I don't see signs of a major slowdown in the deployment of DSL
technology at all," Mr. Gerhardy says.
LOOKING FOR THE CREAM OF THE CROP So if chip and IC makers are better positioned to profit from
the expansion of the broadband market, which ones are the best investments? The sell-offs in market leaders like
Broadcom and Applied Micro have created good buying opportunities, but when asked to pick the one company they
like the most, Wall Street analysts and money managers unanimously picked Globespan. "We own Globespan
because we feel that it represents the best way to play the broadband market today," says Mark Herskovitz, a senior
portfolio manager for Dreyfus.
We agree. Globespan's current product line covers a wide array of sub-sectors within the DSL realm, giving the
company exposure to basically all possible growth areas in that market. The firm has enjoyed strong share gains in
the asymmetrical digital subscriber lines (ADSL) market, which now accounts for 65 percent of Globespan's
revenues. The remaining 45 percent comes from the sale of symmetric DSL (SDSL) chipsets.
Globespan's stronghold in both markets -- coupled with more than $125 million invested in R&D over the last 12
months -- gives it an edge to develop a widely expected new-generation chipset that will bridge the gap between the
two existing competing technologies. "Globespan is in a position to become the first company to offer a single
semiconductor platform capable of addressing multiple versions of DSL," Mr. Gerhardy says.
Due to the nature of DSL technology, you'll need two data ports -- one at the telco end and the other at the client's
premises -- to be able to establish a broadband connection. Data from the International Communication Union
estimates that there will be more than 970 million phone lines worldwide by the end of 2000. That said, there are two
DSL port opportunities for every phone line, or roughly 1.94 billion potential clients for companies like Globespan.
Granted, a lot of those people will opt to use their cable company as their broadband provider, but this is still a pretty
big market. Such a huge potential market has prompted analysts to forecast revenue growth of 40 percent annually
over the next five years. On top of that, Wall Street is all praises about the company's management. "I believe in this
team, and that's one of the main reasons why I recommend this stock," says Arun Veerappan, an analyst with
Robertson Stephens.
GLOBESPAN IS GOOD ALL AROUND Globespan's gross margins, at 61.3 percent, are among the highest in
the industry, and the company has a select list of heavyweight clients, including Cisco Systems, Intel, Copper
Mountain, Lucent Technologies, Nokia, and Nortel Networks. Cisco has been the company's largest customer for
the past two and a half years.
And, on top of all that, the company is a better value than most of its top competitors. Globespan is trading at 45.9
times 2001 earnings, compared to a price-to-earnings ratio of 96.5 for Applied Micro, 67.7 for Broadcom, and 60.5
for PMC-Sierra. The company is trading at a discount despite the fact that its earnings growth for 2001 is expected
to be higher than that of its competition. According to data from polling firm I/B/E/S, which tracks analysts' earnings
estimates, Globespan's 2001 earnings will increase by 186 percent, compared to 162 percent growth for Applied
Micro, 43 percent for Broadcom, and 65 percent for PMC-Sierra.
Much has been written about the problems facing pure-play DSL providers like Covad and Northpoint, and we'll talk
more about the investment opportunities among the DSL companies and other ISPs tomorrow. But the bottom line is
that the savvy investor should not sell companies like Globespan because of problems at Covad. |
