C-Cube: Dogged by DVD
someone is finally realizing c-cube is more than DVD
fnews.yahoo.com
Stock of the Day
Mar 16, 1999
Since we're all consumers as well as investors, it's easy to rely too
heavily on a company's most visible consumer products when we
build our opinion of the stock. In the case of C-Cube
Microsystems (Nasdaq:CUBE - news) , the stock seems to be
alternately loved or hated for its DVD chip business. As it turns out, DVD is a rather small part of
C-Cube's overall business and other segments (which we discuss below) are expected to be much
more crucial to the near-term future of the company.
DVD, short for Digital Video Disc, is heralded as the next generation of consumer home
entertainment to replace videotapes. Yet sales of DVD chips account for just 10% of C-Cube's
sales currently. These silicon integrated circuits encode and decode the digital signals in DVD
players as well as VideoCD systems. VideoCD, which accounts for about 30% of C-Cube's
revenues, is largely an Asian phenomenon with the largest market in China for karaoke systems.
C-Cube's silicon division struggled last year due to a combination of softening sales in the VideoCD
market and a slower-than-expected adoption rate for DVD.
While these markets are expected to stabilize or return to growth in the coming year, the company
can look for the bulk of its growth from its DiviCom division. Divicom makes systems that
compress, transmit and receive large quantities of digital audio and video data. These systems are
sold to satellite (DBS), broadcast and cable customers such as DirectTV, EchoStar, BellSouth and
US West. Divicom accounts for roughly 40% of revenues currently, and the division is expected to
grow at a 35%-40% clip for the next several years.
Another area that is small but growing quickly is set-top decoders for DBS, cable and phone
company services. This segment should account for another 10% of C-Cube's sales this year, more
than the DVD chip business.
All this is not to suggest DVD is insignificant to the fortunes of C-Cube. Indeed, it holds promise as
a major new force in home entertainment and could contribute significantly to C-Cube's growth a
few years down the road. But investors should realize that there is much more to C-Cube's business
than DVD, and the near-term fortunes of the company are likely to be driven more by C-Cube's
DiviCom division than anything else.
The stock lost about a third of its value in recent months due to the disappointing adoption rate for
DVD and the ongoing difficulties in its Asian markets, which analysts expect to persist for a few
more quarters. But longer-term, analysts are forecasting a 25% growth rate in earnings per share. At
$20.81 currently, C-Cube is trading at a P/E of 18.9 using trailing 12-month earnings. The forward
P/E (based on consensus earnings estimates) is 16.9 for 1999 and 14.4 for 2000.
It is difficult to make a true valuation comparison to its peers because of C-Cube's unique
combination of consumer electronics chips and broadcaster transmission systems (the Divicom
business). Suffice it to say that most companies involved in semiconductors and digital transmission
systems are trading at much higher multiples, many like Broadcom (Nasdaq:BRCM - news) are
trading well over 100 times 1999 estimates. Even the S&P 500 is trading at 29 times 1999 earnings
estimates, despite an expected growth rate of just 7% for aggregate earnings. If C-Cube can live up
to the long-term growth expectations, and perhaps show that it's more than just a DVD story, there
would seem to be a lot of room for expansion in its P/E multiple. |
