Humor from the past -- Herb Greenberg, March 3, 1997...........
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March 3, 1997
THE LITTLE CHIPMAKER THAT
(PROBABLY) WON'T
The Next Battle In Consumer Electronics
Herb Greenberg
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 is a business columnist at the San Francisco
Chronicle. |
