Hi Doug,
Re: Why CREAF?
To me CREAF remains fundamentally significantly undervalued. The main reason for this, as you pointed out, is lack of significant revenue growth despite good earnings growth. Everyone knows that you can't grow earnings indefinitely without growing the top line. No one understands this more than CREAF and that is why they are expanding beyond just being a sound card company. CREAF is trying to become the dominant provider of total multi-media solutions. This includes soundcards (for which of course they have the world famous Soundblaster name), speakers (via their recent acquisition of Cambridge), DVD, and video.
Up until recently, they have been primarily driven by Soundblaster alone and have relied mostly on the aftermarket (via the retail channel) for sales. Now that they have a complete solution to offer, hopefully they can penetrate more deeply into the OEM channel (i.e. the boxmakers) and establish some meaningful partnerships.
In addition to Cambridge, they recently made a strategic acquisition of Ensoniq which nows give them dominance in PCI sound as well as the traditional Soundblaster cards. Several OEM's already use Ensoniq.
Their renewed effort in the video card arena represents yet another incremental revenue/earnings opportunity. With solid products and leveraging their brand name, they stand to get a decent share of this admittedly highly competitive segment. I have always been most concerned about the video end of CREAF's business, however, the new products seem to be very competitive and appear to be well received.
DVD is going to be huge. It's not a matter of "if" but "when". Being at the forefront of this market and already on their second generation product gives them a good head start on their competition. I believe they have learned from the CD-ROM fiasco and that is why they have chosen to be a bundler/packager of DVD solutions rather than a manufacturer. Their DVD Encore package has also been very well received by customers and the trade press.
DVD is not only going to be big in PC's but more in home entertainment units. DVD's will eventually replace all CD devices (both for music and PC's), laser discs, and VCR's. Getting a head start on this industry is key even if they may be a little early. Establishing their name in DVD is critical.
As time progresses, many, including myself, believe that the PC and entertainment center functions of the home will be more closely tied and probably eventually seamlessly integrated. Therefore, CREAF's attempt to dominate multi-media peripherals/packages has very far reaching implications and significant potential down the road.
Can they pull this all off. I think so. The main concerns of the analysts were that CREAF was a single product (or product family) company and that revenue growth was suspect. I think by expanding beyond just sound cards and just the retail channel they are going a long way towards addressing these concerns.
Fundamentally, the balance sheet is solid with tons of cash on hand. This cash is available to make other strategic acquisitions should the opportunity arise.
My 1998 target for CREAF is mid to high 30's based on EPS of $2.40-$2.55 and a P/E of 15. I think this is very reasonable.
Hope this helps and thanks for the kind words,
FF |
