Genesis (GNSS): short Hunt Report.
I. Overview
Who wouldn't dream to replace their bulky CRT displays
with sleek flat panel display monitors? Genesis Microsystems
produces the liquid crystal display controllers. So
it's an integrated circuits company.
II. Market
I don't think I would have to work hard to convince people
of the future demand for flat panel display monitors. The
explosion in popularity of laptops is a useful example.
DiplayResearch firm estimates this market to double in 2001
and reach 12 million units. The replacement market could
also be very large as people choose to replace their old
monitors by the newer product. The estimates from Display
Research is for 50% avg growth over the next 5 years.
So Genesis is positioned with 3 products for this market:
analog, dual interface, digital. The analog product is
of course being superseded by digital technologies. Genesis
used to be the leader in the analog area and showed strong
financial growth in 1999 when this type of chip enjoyed
strong demand. However, the combination of a component
constrained market and slowdown in demand caused a hickup
in the growth of this company --viz quarter ending December
1999. This hickup may also explain the unpopularity of
this company with the analyst crowd... not necessarily a
bad sign!!!
The company caught up rapidly in the digital arena, in
part due to its early merger with Paradise Electronics
(paradise? genesis? the gods are with them or what?), and
is now producing a stand-alone digital controller chipset:
the GM3020. This solution has just been adopted by NEC for
two of its most recent flat panel display monitors. NEC is
a BIG player in this field (I think the biggest). Genesis
also enjoys a major lead in the dual interface (analog/
digital) controller chipset market. Competitors are
scurrying to catch up by making acquisitions and
issuing vapor-ware news releases while Genesis' product
is already shipping to OEMs: e.g., Dell's 15in flat pannel
monitors. A competitor, PXLW, recently acquired Panstera
on Dec 13: little late to the game? According to Display
Search, this is the fastest growing segment of the
business. Numbers of last October, numbers where as
follows: Display Search, which notes Genesis's share of the
LCD controller market "jumped from 35% to 42%." It adds the
company also "benefited from the rapid adoption of dual
interface LCD monitors whose market share jumped from 8.9%
to 11% in Q2'00. Dual interface shipments are expected to
grow to 14.5% in Q3'00."
Genesis is also involved in many other hot/intriguing
areas: HDTV, Digital CRT's, and consummer video products
such as DVD. It's main competitors are PXLW, SAGI, SIMG.
The stock performance of the competitors is somewhat
better during the last year, but I (cynically) believe
this is due to support from recent underwriters rather
than fundamental market advantages. In fact, Friday's
trading on GNSS vs SAGI probably starts to reflect the
realization of some of GNSS' fundamental advantages over
the competition.
III. Financial and Stock Information.
yahoo.marketguide.com
as mentioned, note the hickup in revenue trend that marks
the shift from analog to digital. The company has since
grown Q/Q revenues and profits during the last 4 Q's.
Note it's solid profitability --especially compared to
competitors, and its low number of share outstanding
(19.4 million). This puts Genesis' market cap at only
270mil, low in view of the market opportunities. Note the
high level of insider ownership --35% (good) and low
institutional ownership --29% (very good!).
V. G/K Characteristics
A. Is there a discontinuous innovation or a proprietary open architecture
The flat pannel display monitor would satisfy this
requirement, I guess. However, I don't know to which
degree they have intellectual property rights that would
bar the competition from entering their market. The company
does say it bases it integrated circuits on (soon to be)
patented technology: unlike most of the competition, they
have developed and own their industry-leading DVI
technology (digital visual interface). They also claim
to have the highest level of integrations --dual interface
controllers. Someone with more expertise in this industry
might provide a better assesment of their leadership
position than me...
B. Does it have the potential to grow into a mass market
phenomenon, become a standard?
When is everyone going to trash their old CRTs for the
sleeker FPDs? Don't know but I suspect it will eventually
happen when the price of the LCDs drops enough. I don't
doubt the latter will happen so I'm optimistic about the
future of this industry.
C. Are there high barriers to entry and high switching costs?
Probably not as high as I would want! but nevertheless,
the fact that the competition is panicking and acquiring
sartups in the hope of closing the gap with Genesis
suggest that developing the ICs is not that easy. Of
course, in this type of business, the first company that
establishes volume production has a formidable cost
advantage on the competition. Entrenchment with OEMs is
also important and it seems that GNSS is winning the
majority of the big deals.
D. Have value chains developed?
I'm not sure this is a particularly useful issue for
the type of market in which Genesis plays...
E. Have they crossed the chasm?
I think the bowling pins are falling as per the impressive
list of recent design wins:
biz.yahoo.com
biz.yahoo.com
biz.yahoo.com
biz.yahoo.com
biz.yahoo.com
biz.yahoo.com
biz.yahoo.com
biz.yahoo.com
biz.yahoo.com
I think this market for flat pannel display monitors is
well past the chasm stage. I actually think we are in the
very early stages of a tornado.
F. Existence of hypergrowth?
Let me politely suggest this is a bad requirement as
hypergrowth is necessarily accompanied by strong stock
appreciation. Entering a stock at this stage likely implies
much reduced financial returns and significant risk: expect
tremendous downtrend and MOMO player exits if you
misjudged irrational exhuberance for hypergrowth!
I like to find stocks well before this stage. I don't mind
sitting on dead money for a while if I am convinced a
hypergrowth stage will soon happen. For Genesis, the best
indication we have that this is coming (other than the
lengthy list of design wins) is the fact that inventory is
up significantly and is all due to in process wafers (8
million vs 1.5 million in previous quarter). This suggests
hypergrowth to come. I think it will start in the June
quarter and follow through during Christmas 2001. In the
recent past (last four quarters), we've experienced solid
rather than hypergrowth: Q/Q revenue increases are:
+5.4%, +20.8%, +17.4%, +15.0%, not bad in a tough pc
environment!
VI. Summary and Analysis
The facts, as viewed through my rosy glasses, are listed
above. I will let each and everyone on this board reach
his/her own conclusions as to the appropriateness of
including Genesis in your list of potential gorillas or
kings. I would rather let someone with more experience
in deciding whether a company fits potential Gorilla
status make that decision. Irrespectively, however, I
think this stock presents a wonderful investment opportunity
at this juncture.
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