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Technology Stocks : Vitesse Semiconductor -- Ignore unavailable to you. Want to Upgrade?

To: The Gambler who wrote (3330)	2/10/2000 12:19:00 AM
From: A. Edwards	Read Replies (2) \| Respond to of 4710

Mosesmann's convincing argument: RAISING TARGET TO $100 AND ASSIGNING SINGLE BEST IDEA DESIGNATION Prudential Equity Research February 9, 2000 Hans C. Mosesmann (650) 320-1631 John F. Barton (212) 778-1440 - Designating Vitesse as our Single Best Idea (SBI). We believe Vitesse stock could deliver the largest appreciation in 2000 of any stock in our semiconductor universe. - Confident that Vitesse will deliver over 10% sequential growth for the March 2000 quarter with sales to Lucent also growing sequentially. - Design win momentum at Nortel is significant and we expect this customer to break into the ranks of the "over 10% customers" by the end of calendar 2001. - The rules of engagement in the communications chip market have changed: the battlefield is communications knowledge not just process technology. - Raising 12-month price target to $100 from $64 based on a 100 multiple to our calendar 2001 EPS estimate of $1.00 Designating Vitesse as our Single Best Idea (SBI)- Raising Target We believe Vitesse stock is significantly undervalued at current prices. Vitesse is currently trading at 50 times the consensus earnings estimate for calendar 2001. This is a tremendous discount to the average multiple of 104 that is afforded our list of communication semiconductor comparables. We believe Vitesse is a leader in the area broadband communications and is well positioned to benefit from the tremendous growth expected in this market segment and as such should be enjoy a multiple at least equal to the average of its peers. We expect the company's shares to enjoy substantial multiple expansion as investors focus on how well positioned the company is in the area of broadband communications as a result of the its expanding customer base and extensive intellectual property in both Gallium Arsenide (GaAs) and Silicon based solutions. We reiterate our Strong Buy rating, designate Vitesse as our Single Best Idea, and raise our 12-month price target to $100 from $64. Nortel - Vitesse's Next Major Customer Throughout 1999, Vitesse enjoyed ramping revenue at Nortel as a result of four parts that were designed into Cambrian Systems, an acquisition completed by Nortel in December 1998. Our research indicates that the company is enjoying significant design win success at Nortel that has expanded the business relationship far beyond the confines of the former Cambrian Systems design team. We have identified many design wins and pending wins across multiple projects at Nortel. We expect at least three of these wins to generate revenue in the current quarter and others to start ramping throughout the end of 2000. Based upon the current design win momentum, we believe Nortel could break into the "over 10% customer" category by the end of 2001. The Lucent "Cloud" Should Clear We believe events at Lucent (inventory adjustments in mid 1999 and Lucent's less than anticipated results in the December 1999 quarter) have been the primary drag on Vitesse's share price as of late. We expect this "cloud" to clear as investors see continued sequential growth at this account and realize that Vitesse's business has diversified well beyond its relationship with Lucent (reference the company's success at Nortel outlined above). We expect Vitesse's revenue to grow sequentially at Lucent. Our research indicates that Vitesse has secured key wins in the new OC192 WaveStar system. We are also seeing indications that Lucent's production schedule for this product is accelerating. If this acceleration does materialize, there could be upside to our estimates of the total revenue from Lucent. Even without a significant ramp in OC192 we believe Vitesse will enjoy sequential growth at Lucent as a result of existing business in areas such as OC48. The Battlefield Is Communications Knowledge Not Process Technology Much conversation has taken place recently with respect to Vitesse's future competitiveness as a result of potential developments in the area of process technology. We do not believe that such focus on process technology is appropriate. We believe the rules of engagement have changed in the semiconductor business. Gone are the days that process technology is the corner stone of a company's competitive advantage. Today, process technology, or the resulting chip, is only a medium to carry intellectual property (IP). What differentiates communication semiconductor companies today is their knowledge of communications systems and their ability to design enabling solutions for the manufacturers of those systems. Over the years, Vitesse has demonstrated its expertise in this area by introducing leadership products time after time. We know of few companies that possess more engineering wherewithal in this market segment than Vitesse. Our research indicates that Vitesse is currently evaluating or developing products in SiGe, GaAs, InP, and CMOS Silicon processes. We are confident that with the company's extensive communications IP and flexibility to utilize the most effective process technology that Vitesse will be able to offer leadership products for the future generations of communications equipment.