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Technology Stocks : LSI Corporation
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To: Tony Viola who wrote (18630)5/30/1999 5:26:00 PM
From: shane forbes  Read Replies (1) of 25814
 
Tony:

Re: 'Is LSI remade that much?'

Yes and no. Consider:

(1) Gate Arrays vs. Std Cells: LSI's 1998 revs were 1.2 b in std cells and 0.3 b in gate arrays. This trend of rapidly deteriorating gate array rev and rapidly appreciating std. cell rev has been ongoing since 1995. When I spoke about 2 LSIs this was what I was referring to. The gate array biz gets diddly squat valuation, the std. cell piece gets a very high valuation and over time the stock gets a disproportionately higher valuation than a commodity type company.

(2) Market Segmentation and Big Name Customers: Been there done that. The only thing I see is that LSI's networking division is doing far better than most of us would have imagined. On Techweb there is an article about how CSCO is leaning towards std cell ASICs vs FPGAs for their networking chips (the cost thing). LSI has always had the big name customers. Note that for the first time ever in their annual report we got a list of names. Confidence? Storage was a gift - I said so when it happened and I say so today. All the dopehead analysts who were talking about detiorating prices were just good for sound bites (sp?) but nothing else. Talk about completely missing the picture.

(3) Sony PS II: This is a big uncertainty that I knew did not really exist (85% prob.) but the market and all the know-it-alls used it as a good excuse to dump the shares every now and then.

(4) Outsourcing: This is a significant change. I had always wanted LSI to partner with someone to get their cost structure down. The fact tha LSI had a lower ROE than MU was laughable to me. Well now with the Silterra thing they are learning (finally). I sense part of the problem was that LSI was unwilling to give up moocha control of their processes and some of the bigger companies may have wanted more than LSI was willing to give.

(5) Filling in Gaps: Seeq, ZSP, more? This is a change. I wonder if LSI which had not made an acquisition in a long time suddenly saw the light here? It is good to buy out small companies that have the IP but not the resources or capital to become huge companies. CSCO knows that. Maybe LSI is learning.

(6) SOC: Three years ago Van Wagoner like everyone else made that famous statement that 'SOC was hype'. Today (and it was a sudden recognition much like the rapid pace of the world - it was as if all at once people said SOC good) it is accepted as the way to go. I've always believed that with new ways of doing things, in the earliest stages, you go through a plateuing period when you have to iron out the kinks. I believe this was the case with LSI for 1996.5 - 1998.5.
However once you get past the plateau things rapidly appreciate as 'everything comes together all at once'. Let's see. Note that LSI's incorporation of the analog and DSP pieces into their chips is just such a major step. So are things like the DCAM-103, the SC2000 (?) chip for STBs, the highly integrated Sony PSII. You can't do these things overnight as NSM has found out (not quite true but it has been more difficult for them than they earlier believed) and others will too. This isn't easy stuff.

There is an eerie resemblance to 1994 BTW. Recall that then LSI was the best performing stock for x quarters or x part of the year; LSI got the Sony PlayStation contract; LSI had the convertible offering; LSI was just uttering the SOC thing. In 1999 we are seeing a three-peat + the Beyond SOC thing. So maybe LSI has to reinvent themselves and has reinvented themself yet again. But I think this was recognized (by some of us) several moons ago but by the market only in the last 2 quarters. There are more believers now at 37 than there were at 12. Funny how that happens. (Incidentally you can see how weak these companies that regularly reinvent themselves are in building wealth. Compare LSI's retained earnings to capital invested.)

(I will give Amazon some credit. Two years ago when someone said Amazon I thought of a river, today I think of a bookstore.)
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