hey look, it's a cigar butt!
The future ain't as expensive as it used to be.
Times were when a cutting-edge technology company like Alliance Semiconductor (ALSC, Nasdaq) would cost you big bucks. 1n 1995 a share of ALSC traded as high as $48.30 (split adjusted) and carried a PE of 185. Today that same amount will get you four shares and change to spare.
At $12 a pop, ALSC sells for 70% of its $17 a share book value. Plus, it's got eight smackers a share sitting around in cash. That means the market values Alliance's ongoing business at all of $4 per share, a mere 7 times the last four quarters' earnings of 55 cents.
In other words, ALSC is cheap -- basement-level, Ben Graham, cigar butt cheap.
It's also been performing better of late. After three years of losses, Alliance has turned in four profitable quarters in a row, accompanied by rising unit sales and revenues.
So, are we cheapskates here at TI going to pick it up and stick in our mouths... er, portfolio?
Well, we're tempted, but this one's a pass.
Remember that we're not just interested in cheap companies, but in cheap & obscenely profitable ones. The down side here -- and you knew there had to be one -- is that Alliance is in a truly lousy line of work. They make computer memory: DRAM and SRAM for PC's and networks, and flash memory for handheld goodies like games and mp3 players. Sounds solid enough, but in reality it's a cutthroat business with plenty of competition.
Do you know what kind of memory is in your PC? Do you care? Me neither -- and that's why it's impossible for any single producer of the stuff to charge a premium for its product. When consumers are oblivious to whether they're using DRAM from Samsung, Hyundai, Micron, NEC, Toshiba, Hitachi, or Alliance Semiconductor, you can bet that the producer who can offer the lowest price will get the contract.
The result is pure supply and demand, with the classic booms and busts, thin margins, and general inability to become stinking rich that marks every commodity business.
In fact, Alliance's own 10K for fiscal 1999 puts it rather well: "The semiconductor industry is highly cyclical and has been subject to significant downturns at various times that have been characterized by diminished product demand, production overcapacity and undercapacity, and accelerated erosion of selling prices." It's that last factor, decreased pricing power, that particularly puts a chill up our spines.
The latest bust for Alliance came in the mid-1990's. All through the tech stock gold rush, ALSC turned in losses: 43 cents a share in '96, 15 cents in '97, and another 53 in '98.
It could happen again, and in fact it probably will. Things are certainly headed back downward again. The latest quarter, ending in December '99, was flat with the one before, and the thundering herd on Wall Street is predicting a big earnings decrease from 22 cents to 15 or so when ALSC reports at the end of the month. While we're no fan of sell-side "analysts", we do figure they're likely to be at least roughly right this time round.
If Alliance couldn't turn a profit when it's customers were rolling in cash, how's it going to fare now that the bubble has finally burst? Even the Street can see that when plenty of your clients -- the likes of 3Com, Cisco, Lucent, Nortel, Nokia, Motorola, and Sony -- have handed out earnings warnings, your business is likely to suffer as a result.
Given Alliance's inability to stem the overall trend toward lower prices for its product, and it's customers who suddenly find themselves with less cash to spend, only the most feverish of tech-boosters could call ALSC a growth stock, let alone a reliably profitable one.
But wait, there's more...
Did we mention that a year ago, Alliance reported quarterly earnings of $13.47 per share?
Turns out they run a little venture capital outfit on the side. (Hey, didn't you wonder where all that cash-per-share came from?) A chunk of book value lies in equity positions in smaller tech companies -- last quarter Alliance reported having made investments of about $68 million, just under $2 a share. And the vast majority of the money Alliance has made over the last half-dozen years has come from selling some of those shares, and not from peddling random access memory.
It's pretty much impossible to know when, if ever, ALSC will realize more moolla from its investments. While the VC operation makes ALSC all the more intriguing, it lacks the certainty of payout we'd need before putting our money on the table. Still, the possibility of another big hit certainly puts speculative spark into an otherwise drab issue.
ALSC looks like the kind of stock that might have a short-term run up in price. But that sort of quick, in-and-out trading is not what we're about here at TI. If you're into that, by all means take a look at ALSC. After all, if you do decide to take a flyer on it, you'll get a venture capital lottery ticket with your cigar butt.
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