Analyst's Latest Recommendation for Taking the opportunity to Buy
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01:30am EST 15-Dec-98 BancBoston Robertson Stephens (Moosa, Elias 415-693-3418)
AMCC: Strong Business Trends and Jittery Investors Combine to Present ...
December 15, 1998
A P P L I E D M I C R O C I R C U I T S C O R P O R A T I O N
Strong Business Trends and Jittery Investors Combine to Present
Buying Opportunity, in our view.
Elias Moosa (415) 693-3418 elias_moosa@rsco.com
Mark Edelen (415) 248-4688 mark_edelen@rsco.com
BancBoston ROBERTSON STEPHENS BancBoston ROBERTSON STEPHENS
Applied Micro Circuits Cor AMCC $32.44 12/15/98
Industry: Semiconductor
CHANGE IN... YES/NO WAS IS Elias Moosa (415) 693-3418
Rating: No SBUY Mark Edelen (415) 248-4688
EPS 1998: Actual $0.49
EPS 1999E: No $0.79 FYE: MAR 1998 1999E 2000E
EPS 2000E: No $0.96 EPS*: 1Q $0.10 $0.17 A $0.22
52-Week Range: $41-$9 2Q $0.10 $0.20 A $0.23
Shares Outstanding (MM): 24.6 3Q $0.13 $0.21 $0.25
Market Cap: 798.1 4Q $0.15 $0.22 $0.26
Avg Daily Volume (000): 459.0 Year $0.49 $0.79 $0.96
9/98 Bk Value/Sh: $4.25 P/E - 41.2x 33.7x
9/98 Tot Debt/Tot Cap: 7% Revs($M): 1998 1999E 2000E
1998 ROE: 23% 1Q $17.1 $23.7 A $29.5
Price/Book Value: 7.6x 2Q $18.2 $25.1 A $30.5
9/98 Net Cash/Sh: $2.38 3Q $19.7 $26.6 $32.5
Dividend/Yield: $0.00 0.00% 4Q $21.7 $27.9 $34.5
3-Yr Sec Growth Rt: 20-25% Year $76.6 $103.3 $127.0
* Fully-taxed EPS shown Equity Mkt/Rev. 7.7x 6.3x
Key Points:
** AMCC stock was volatile on Monday, down 17% within the trading day while the
NASDAQ was down 3% at its low of the day. Judging by investor inquiries,
much of the concern emanated from concerns that a key customer --Nortel--
had decided not to upgrade a system that contained an older chipset by
another supplier.
** We must admit, we had not counted on upgrade of legacy systems when
evaluating the opportunity set for AMCC. In fact we have based our optimism
on the potential for the business given the company's core technology set. A
project-by-project accounting of the company's design wins, while useful if
such information were generally available, could in our view prove
misleading otherwise. We encourage investors to monitor technology
capabilities, product road map and relationships with key OEMs as better
metrics for the state of the company's business. All these metrics remain
healthier than ever, in our opinion.
** Furthermore, our inquiries lead us to believe that AMCC's relationship with
Nortel remains excellent and its status as the key supplier of broadband
devices unchallenged. We look forward to another strong quarter from the
company's communications business as both orders and revenues grow 8-12%
sequentially over last quarter.
** While investors have become particularly sensitive to multiples over the
past two months, we find yesterday's reaction somewhat understandable, but
do underscore our belief that it is likely based on a fundamental
misunderstanding of the nature of AMCC's business and hence misguided. As
such, given the strong trend in the business we encourage investors to view
sell-off in the stock as opportunities to build positions.
THE COMPANY: Applied Micro Circuits designs, develops and manufactures high-
performance IC's for the world's communication infrastructure. Products
offered for the telecommunications markets address SONET/SDH and ATM
transmission standards, and products for the data communications markets
address Gigabit Ethernet, ATM and Fibre Channel transmission standards.
Headquartered in San Diego, AMCC currently has employs more than 350 people.
INVESTMENT THESIS: Our investment thesis on AMCC stock is based on the
following:
1. We believe management has successfully positioned the company in a high-
velocity business model that emphasizes profitability and an opportunity to
participate in markets that are growing 35-45% annually.
2. The company's core competence in low-cost, high-speed processes and in-house
design expertise could prove to be sustainable advantages and a winning
solution in its markets of choice.
The communications markets, much like the computing markets several years
before them, are entering a period where more and more of the functionality of
systems are transferring to standard, off-the-shelf chips. We believe that this
dynamic can accelerate in the years ahead and can translate to growth rates in
excess of the market's growth for merchant chip manufacturers such as Applied
Micro.
INVESTMENT RISKS: Among the risks are that the company's products compete in
rapidly changing markets, requiring Applied Micro to consistently forecast the
direction of product cycles. Additionally, customer concentration remains a
risk as 35-40% of the company's revenues are derived from their top five
customers.
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