TO ALL: WHY $160 a share is a real possibility in 12 months (until events of the past week)
1. Despite its superb performance for the first six months of 1999, LSI is merely selling at 25 times the next 12 months earnings—hardly overvalued, since the lowest it has ever sold (in a bad semi market) is 17 times the next 12 months earnings.
2. Despite it superb performance for the first six months of 1999, LSI is still not considered to be among the truly spectacular growth stocks, nor has it began to achieve a price to sales ratio that even begins to suggest that it is at the top echelon within its market segment.
3. The market is merely viewing LSI as at the beginning of the semi cycle ( of unknown duration)
4. The market has not taken into account the fact that much of future revenue in LSI will be derived from new proprietary (or partially proprietary) products (Coreware) whose product cycle has just begun.
5. Because these are proprietary products, they remain much more under LSI's control rather than the customer, and as a consequence, LSI will have over time greater pricing strength.
6. The market has not recognized the fact that these proprietary products provide much longer sales cycles to the end customer, which as a consequence will to some extent ameliorate what will always be a cyclical business.
7. The market has always demonstrated a willingness to pay a premium for the “best in its category.” Currently, companies such as XLNX and ALTR command price to sales premiums of 10 to 14 times sales, whereas LSI “labors” along at a price to sales ratio of 4 times sales. Because of LSI's bright future, there will soon be a perception in the market that LSI should supplant such stocks as ALTR, XLNX, and even VTSS as those stocks for whom one must pay a premium over and above its revenue and profit growth. Currently, LSI still lingers in the suspect list.
8. SOC (System on a chip) has only been a concept, and is about to truly become a reality. LSI is about to be the right company with the right products in the right market.
9. LSI has made the effort to distinguish itself in the past number of years so that among its customers, it is one of a handful of companies in what is becoming an oligarchy with increasing barriers to entry (at least at the IP level as opposed to the Fab level) , and the customers will do everything in their power to make sure that this oligarchy does not become a monopoly. As such, this will provide some revenue support that will ameliorate the cyclical aspect in the stock.
10. LSI is the largest independent producer of specialty chips. As a result, it will always find a market for its product, simply because many of its customers would be forced to purchase chips from competitors
11. LSI is still a very attractive take over target, which would give it some sort of price support.
12. Given the reluctance of semi customers to have one source supply, it is in the area of CDMA, where the real possibility of LSI becoming a $160 becomes apparent. The growth potential of CDMA is widely acknowledges and reflected in the P/E multiple of over 100 that is afforded QCOM. The enthusiasm of both Corrigan and Dahne for their CDMA chip was palpable at the CC, and if the market sees tangible results in CDMA sales, then it is very likely that the market will accord that portion of LSI's business a corresponding multiple. This business could ultimately become as much as 15 to 20 percent of all of LSI's business. Indeed, if CDMA is a hit for LSI, they will need Silterra ASP.
13. Despite the fact that pricing is determined at the time of design wins, there is still room for pricing expansion, which of course goes straight to the bottom line.
14. There is a very real possibiliy that LSI will be showing a growth rate of 30% next year, which of course means an even greater growth in profits.
15. The much ballyhooed consumer sectors of DCAM, STB, and DVD are just beginning to contribute to LSI's bottom line, and the real addition to revenue will be in 2000 and even more so in 2001. Thus, as with many of LSI's products, the forward look in 2000 for 2001 will be even better than it is this year for 2000.
16. Because this cycle was so long, it stands to reason that the next up cycle will be very strong
17. Japan is now starting to make fundamental changes that will positively impact its economy, and the stronger Japanese economy will have a very positive impact on LSI
18. The gap between the haves of the semi industry and the have nots is increasing, and as already noted, LSI is one of the haves.
19. The cyclicality of the industry is primarily related (although not exclusively) related to fab investment, and LSI has taken the required steps to moderate that portion of the problem by entering into an agreement with Silterra.
20. This past week demonstrates the tremendous overall strength in LSI's stock. People were looking for an entry point to buy LSI on a dip, but it is very possible that this dip has already occurred. While we may see a lower price in LSI because of overall market fluctuations,
21. The concept of PSII being a low-end box/entertainment center for families was raised about six months ago on this thread by an infrequent poster whose name I do not recall. As everyone on this thread (or anyone who spends an inordinate amount of his time on a computer) knows, there are real advantages to working on a machine that does not have entertainment, just as there are real advantages to having an e-mail capable machine that is dedicated to entertainment. This is particularly true in households where there are two incomes. Given the previous success and unanticipated long term staying power of PS I, I believe that the market will react immediately to PSII's potential once initial sales begin, and the machine is deemed a hit. Given its spectacular growth potential, it would not be unusual for the market to assign a valuation of 12 times sales to that portion of its sales.
22 The potential for embedded FPGA as part of LSI's Coreware is utterly spectacular. LSI goes from being an ASIC maker with a limited large market to being a high end maker of chips for just about everybody—with attendant high margins, since these are typically customers who are time sensitive. Rather this is a much higher margin product simply because LSI owns the technology
and thus doesn't need to worry about the customer lowering margins because it is his (the customer's) engineering. What a great combination—less chip space for the customer with the ability to tweek fewer components in his product so that he doesn't need to reinvent the wheel on every product change.
It
23. Within the next twelve months, I am expecting LSI to sell its storage systems division by which time it will have significantly expanded its international markets. I don't think that it's a coincidence that Rich Morris was “in the room” for the last CC. I can feel it in my bones that LSI is marketing the storage systems division. Such a sale would add about $600 million to LSI's growing capital reserves--another very big plus in the eyes of the market.
24. In the storage components area, LSI has just begun to grow its business. Xeon chips promise to be a lucrative market in the near future, and Fibre Channel promises explosive growth.
25. Common sense tells me that if a company is growing at a rate of 30 to 40 percent a year, that the market would put a very high valuation on this product.
26. All of this adds up to year over year growth rates that will exceed the semi market by 10 to 20 percent in the foreseeable future—which in turn promises year over year P/E growth of 50 percent. Thus, given Mark Edelstone's earnings estimate of $2.50 for 2000, it is possible that we will be seeing forward looks of close to $4.00 a share for 2001, and with that kind of growth rate, much of which is considered sustainable near term, it is possible (though not probable) that LSI will indeed hit $160 by August 2000. Indeed, with that kind of growth rate, LSI has the potential to be one of the true “nova” stocks for the next twelve months, as the market has repeatedly shown a predisposition for paying outsize premiums for those stocks whose companies truly show superior performance
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