Here's an old Greenberg article that should tie things up for you.
You're on the right track.
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THE LITTLE CHIPMAKER THAT (PROBABLY) WON'T THE NEXT BATTLE IN CONSUMER ELECTRONICS
HERB GREENBERG
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03/03/97
Fortune Magazine
Time Inc.
Page 36
(Copyright 1997)
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If you believe the hype, digital videodisk players, or DVDs, are about to become the world's hottest consumer electronics product. They are revolutionary. They can play nine hours' worth of audio and video. They will replace your VCR and your CD player, while also becoming standard equipment in personal computers, videogame machines, and just about anything else that uses compact disks.
Consumers ought to be skeptical about the words "hottest" and "revolutionary," and so, of course, should investors. The major commercial launch of DVDs hasn't even started yet, but some on Wall Street have already decided that the big winner in this business will be C - Cube Microsystems of Milpitas, California, which makes digital-video compression chips that can cram a movie onto a compact disk.
The happy version of C - Cube 's story is based on the company's pedigree in the consumer electronics business. C - Cube has had great success selling chips used in another technology called video compact disk players. (VCDs are less advanced cousins of DVDs and are sold mostly in China, where they're used to play karaoke music and to watch X-rated films.) C - Cube 's numbers have indeed been impressive: Sales were $320 million last year, compared with $45 million in 1994; over the same period, earnings increased to $1.63 per share from $0.32 per share. Its stock, meanwhile, went from $10 to $74 before last summer's tech-stock correction brought it down to its current level in the low $30s. As Alex. Brown analyst Greg Mischou recently told his clients, the company "is ideally positioned to benefit from the digital-video revolution."
This all sounds exciting, but there's an even more compelling case against C - Cube . (A lot of people are shorting this company. In fact, C - Cube is one of the most shorted issues on Nasdaq.) For one thing, the company's hold on the VCD chip business is slipping--ESS Technology, located a few miles away in Fremont, California, is selling a cheaper chip and is gaining market share.
Losing ground in an established market is bad enough, but what's worse is that C - Cube 's prospects in an impending DVD craze--even if demand does become as heated as the hype--may not be much better. Unlike in the early days of VCDs, when there wasn't much competition, the DVD player marketplace will be crowded from the start--semiconductor manufacturers such as LSI Logic, SGS-Thomson, Zoran, and ESS will all likely produce chips to compete with C - Cube 's, as will many of the DVD player-makers themselves.
Adding to C - Cube 's potential problems is the delayed rollout of DVD players in the U.S. Under the best of circumstances, MPEG Associates International, a tech-stock research firm, says that only 750,000 players will be sold throughout the world this year, with the real launch not occurring until sometime next year. Furthermore, whatever units actually get shipped probably won't sell all that fast because of high prices (early models will run from $500 to well over $1,000) and the fact that the first generation of DVDs can't record.
In other words, even if C - Cube scores some orders for its DVD chips, it may have to wait for a while--a long while--before it makes money off this business. And that would be disastrous for C - Cube 's share price. When chip companies go bad, "they trade at one to two times their book value," says shortseller Marc Cohodes of Rocker Partners in Larkspur, California. He figures a damaged C - Cube should trade between $3 and $6.
C - Cube CEO Alexandre Balkanski didn't respond to several interview requests. In the meantime, expect the Street to keep talking up C - Cube as the DVD story. Just don't say we didn't warn you if it has an unhappy ending.
--Herb Greenberg
HERB GREENBERG is a business columnist at the San Francisco Chronicle. |
