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Technology Stocks : LSI Corporation
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To: Jock Hutchinson who wrote (23742)3/27/2001 12:30:20 PM
From: uu  Read Replies (3) of 25814
 
Hi Jock:

Do you think LSI has not much downside risk especially considering the following:

1) Cisco and Sun who are LSI's big customers having a heck of a time with meeting their revenue and are feeling a major slowdown. I personally feel LSI will be impacted based on them (if not with any of their other customers).

2) In a recent interview earlier this month Wilf predicted a negative 10% growth for the semi industry as a whole - which most likely he also meant LSI too - for 2001. The current price still assumes LSI is going to grow revenue by about 6% (or at least that is what I am assuming).

c) VTSS (one of the main telecom. chip suppliers) just warned of a dramatic slowdown in their orders and revenue. VTSS is a pure telecom chip player and if they have difficulty I have a hard time accepting that LSI is not having similar problems (especially since now 50% of their business comes from the telecom industry).

d) LSI's purchase of CUBE does make sense. However the concerns I have:

a) They are going to dilute the shares (0.79 shares of LSI for each share of CUBE). Based on CUBE's appx. 50 million outstandiing shares, the dilution will be in the neighborhood of about 40 million shares. Not much but still that is about 12% dilution to current LSI's 322 million outstanding shares. Can CUBE's earnings and revenue really make up the difference?

b) I can see why CUBE may have wanted to be bought out by LSI. And that all has to do with LSI's cash sitting in the bank which is about $1.5 billion compare to CUBE's $50 million. At the same time this also indicates that CUBE was expecting to start losing money and that would not have gone well with its cash, so that is why they figured a bigger guy of the size of LSI can be a nice daddy to them. But what this also means is that CUBE will be a drag on LSI's earnings for the next couple of quarters (at least).

So based on all above I have a strong feeling LSI has a lot of downside risk. Of course I know that if I have already figured out all these a lot of smarter guys on the street have also done that well in advance, and therefore the current price maybe reflective of all this. But still....

I apppreciate your thoughts on the downside risk.

Best regards,

- Addi
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