Hex - Here is an article from Individual Investor online:
NeoMagic Works its Magic in Tough Industry
Analyst: Bob Hirschfeld
NeoMagic Corp. (NASDAQ: NMGC) is in the graphics chip business. Unfortunately for the company, the word on the Street is that graphics
chips are a lousy business.
Graphics chip makers are beset by a short design cycle and surplus
capacity of numerous huge fabs. The industry is facing both price and time constraints. In addition, the competition is ample, including Chips & Technologies, a division of Intel Corp. (NASDAQ: INTC), Trident Microsystems (NASDAQ: TRID), ATI Technologies (NASDAQ: ATYTF),
and S3 Inc. (NASDAQ: SIII).
Smart Strategy
Yet NeoMagic stands out as a top performer in an otherwise difficult
business. Why? Because over the past three years the company has
maintained a consistent focus on low- and middle-range laptops, a
strategy that affords some sanctuary from the otherwise commodity-like
nature of graphics chips.
Third Quarter
NeoMagic's results for the third quarter, ended October, were impressive. Revenue was $67.4 million, 81% higher than one year ago, and 26% higher sequentially. Earnings per share were $0.33, compared to $0.19 per share the year prior, and $0.27 sequentially. For the first six months, the company threw off $20.9 million of operating cash flow, as compared to $3.6 million one year ago versus total capital expenditures, so far this year, of $2.5 million. That's not too shabby.
NeoMagic, which is the world's first producer of single-chip multimedia accelerators for notebook computers, offers products that tend to be lighter and use less power than those of its competitors. Name a laptop manufacturer -- Acer, Compaq, Dell, Gateway, HP, Micron, NEC, and Sony -- they all use NeoMagic chips. Selling to every Top-20 notebook vendor says something about the superiority of NeoMagic's product.
NeoMagic's market share stats are impressive. During the second quarter, the company was first in revenue and units sold for notebook PC multimedia accelerators. According to IN-Stat of Cahners, NeoMagic
captured 54% of the total notebook graphics market of $94.7 million, up from 49% the prior quarter. In units, the progress was to 46% from 40%. Even better, the improvement came during the traditionally soft second quarter.
One bull on the shares is Brian Alger of Preferred Capital, who rates
NeoMagic a Strong Buy. Alger sees the company dominating its niche by
offering notebook makers integrated solutions that provide more embedded memory, less power, and greater bandwidth than any other.
Alger notes that Neo Magic has beat estimates 7 times in a row and
manages its growth efficiently. The company's inventory turns for the last quarter are 20, versus a norm of 6-8 for chip makers, and its accounts receivables are at 24 DSOs, compared to 19 the second quarter, though within historic bounds.
Price Target
Alger recently raised his 1999 (January) forecast to $1.19, from $1.12 and his year 2000 forecast to $1.42, from $1.32. The stock is now trading at 13 times year 2000 estimated earnings, which seems way too cheap for a company with demonstrated earnings growth of over 30% and a near-franchise in a growing niche. The analyst argues the stock deserves a 20 multiple and target price of $30 per share.
Risks
Risks in NeoMagic include the company's current dependence on one segment, and its exposure to unexpected price erosion in DRAM, which could lower the value that embedded solutions have over alternative external memory designs. Mark Singer, a strategic planner with NeoMagic, says, though, that DRAM price variability has little effect, since the company can maintain gross margins, either through cost savings or pass-along pricing.
Then there's the competition. ATI Technologies recently announced a new single-package 3D accelerator. Its devices are actually integrated devices -- chips combined together in one package -- as opposed to embedded ones. Although ATI Technology is aiming at the high-end (where power consumption is less of a concern), that is not where NeoMagic lives. The company's strength is that of value-price, not high end, according to Singer.
The industry appears sound, given that the worldwide notebook market is forecasted to grow 19% in 1999, well ahead of the 15% forecasted for desktop PCs. Dataquest estimates that notebook graphic market could grow to about 23.4 million units in 2000, up from 11.4 million units in 1996, which is a compounded annual growth rate of about 20%.
Bottom Line:
Obviously Neo Magic can't keep growing revenue at a 30% clip in a
segment growing at 20%, given its already-dominant market share. So,
what then? Well, next comes a broader product portfolio and targeting the consumer electronics markets, in particular the DVD segment. Alger told us he thinks the company will have successfully diversified by the second quarter of 1999. The analyst said it's unlikely NeoMagic will miss its due dates, given its great execution abilities and phenomenal design team.
vincenzo |
