ALSC: DOWNGRADING TO ACCUMULATE FROM STRONG BUY BASED ON
SOFTENING PRICES.
Alliance Semiconductor (ALSC), headquartered in Santa Clara, CA, designs, develops, and markets high performance memory and memory intensive logic products. The company's core product lines include static random access memory, dynamic random access memory and flash memory. Alliance markets its products to the desktop and portable computing, networking, telecommunications, and instrumentation markets.
HIGHLIGHTS
· We are lowering our rating on ALSC to Accumulate from Strong Buy based on the current demand
environment and a general industry slowdown, resulting in weaker pricing for some of its products.
· Given the current tone of business, we believe that visibility has declined from potential push outs
and cancellations.
· We are lowering our current quarter revenue and EPS estimates to $70 million and $0.24, down from
$78 million and $0.27. Our full year 2001 and 2002 EPS estimates go to $0.84 and $1.10, from
$0.90 and $1.25, respectively.
DISCUSSION
Softening pricing environment. Following our trip to Asia, we believe that the pricing environment for
legacy DRAMs has deteriorated. In recent quarters, Alliance has been able to significantly exceed our
expectations as it was able to gain access to critically needed capacity while maintaining firm, if not
increasing ASPs. We believe that this will not be the case for the December quarter as the effects of a
weak mainstream DRAM market have trickled down to the legacy DRAM market. While lower wafer
costs may, to some extent, offset soft pricing and help to maintain margins, we believe that Alliance’s top
line could be at risk.
Estimate Revision. As such, we are lowering our December quarter revenue and EPS estimates to $70
million (7% sequential growth) and $0.24, down from $78 million (21% sequential growth) and $0.27.
Our full year fiscal 2001 estimates are now $256.9 million and $0.84, from $274.9 million and $0.90, and
our full year fiscal 2002 estimates are now $335 million and $1.10, down from $390 million and $1.25.
New Price Target of $18. We are also revising our price target to $18, down from $44. Our price target
reflects a 10 times multiple assigned to our calendar 2001 EPS estimate of $0.83 and its fully taxed
equity investments. We believe that there is likely minimal downside risk at these levels as ALSC is, to
some extent, like a tracking stock for its significant equity investments in UMC, Chartered
Semiconductor (CHRT, not rated, 32 5/8), Broadcom (BRCM—117 1/4, Accumulate rated by John
Barton), Vitesse (VTSS—56 5/8, Strong Buy/SBI rated by John Barton), and PMC Sierra (PMCS—102,
Strong Buy rated by John Barton).
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Prudential Securities Incorporated makes a primary over-the-counter market in the shares of ALSC, BRCM, VTSS, PMCS. |
