Here's a snippet of the Barron's story in an interview with Mr. Wick of Seligman Tech:
Q: What else do you like?
Wick: Creative Technology.
Q: The Soundblaster company.
Wick: Creative reported an outstanding September quarter.
Q: Do they still make sound cards for PCs?
Wick: Sound cards are still the key product. Creative essentially invented PC audio. About 80% of the company's revenues still come from the Soundblaster product line. The standard, surprisingly, has not eroded over time, despite repeated predictions that Intel or Microsoft would eventually figure out a way to kill it off. The problem is that virtually all PC games have been written to the Soundblaster standard. No one has been able to come up with an emulation of Soundblaster that works 100% of the time. And the PC companies are quite nervous about coming out with a PC that has the potential for incompatibility.
Q: At one point, this company had been knocked firmly on its behind.
Wick: The stock was absolutely decimated a few years back. The company made the mistake of getting into the CD-ROM business and becoming vertically integrated. They got into that business because they sell CD-ROM upgrade kits with their Soundblaster audio cards. They realized they made a big mistake when the CD-ROM market went through a bloodbath over the past couple of years. Creative exited that business, took a big writeoff. They've since had a significant increase in gross margins, which have risen from a low of around 10% at the trough to 33% in the most recent quarter.
Q: So, they're making money again.
Wick: The company, in the space of a little under two years, has generated almost a half-billion dollars of cash. They now have $5 a share in cash on their balance sheet. They have lots of new products that have been meeting with some success, including a 64-bit version of the Soundblaster audio card. They've also got a graphics card, which has met with a good response in the market, called the Graphics Blaster. And, maybe most importantly, they have a product that came out October 31 -- a $379 DVD multimedia upgrade kit. At $379, it's far and away the cheapest in the market and it could be a hot product for Christmas. Moreover, the stock is cheap, selling at not much more than one times revenues and roughly 10 times June '98 earnings.
Q: Uh, Paul, pardon me, but what is the point of a DVD upgrade kit at this point? There's very little software out there.
Wick: The software is coming. The greater storage capacity of the DVD compared to a CD-ROM will be attractive to some people. It's likely to be a niche market to some degree. But on the other hand, there probably will be some people who want it -- maybe they'll install it on their laptops, and use it to watch movies on airplanes. Their first foray into this area, which came out earlier this year, was priced at $500 and it sold very well. So there seems to be some enthusiasm.
Q: The stock is trading ..
Wick: .. in the mid-20s.
Q: And this year, the company should earn ..
Wick: ...about $2.60 a share.
Q: Cheap! Why do people hate this stock?
Wick: It's a combination of things. The company is based in Singapore, although almost all of its revenues come from the U.S. and Europe. The CEO doesn't speak English very well. For some reason, it just isn't on people's radar screens.
Q: What else do you like?
Wick: Some semiconductor-equipment stocks. Bargains abound in the sphere right now. We think 1998 is going to be somewhat of a recovery year. We're not looking for a huge upswing in capital-equipment spending in '98. We do think that 1999 has the potential to be an outstanding year. We're seeing improved profitability and more stable business in all of the leading companies. If you bought these stocks over the years whenever people have thrown in the towel on them, usually they recover over the ensuing 12-24 months. What perplexes me is that these stocks are getting shellacked very early in the start of an upcycle in the industry. I don't buy the argument that we are about to roll over into a major-league recession in the industry. It would be unprecedented. |
