Play the Next Big Thing in TV at a Discount
By
Michael Brush
September 15, 2005
Silicon Image (SIMG)
– a designer of chips that play a key role in high definition TV (HDTV) --
is a great example of one of those gambits where it’s a smart move to bet
with insiders even though it seems like the whole investing world is against
you.
Thanks to a calamitous combo of a mass exodus of board members, the
resignation of an auditor, a mysterious leave of absence by a chief
financial officer, and analyst downgrades following a hiccup in business
last quarter, shares of Silicon Image got sliced in half since last
December.
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They recently traded down near $9. That’s where chief executive Steve Tirado
stepped up and bought $900,000 worth of stock in late August. What does
Tirado know that we don’t?
Probably just that this too shall pass.
Turmoil at the top has justifiably troubled institutional investors. They
would rather sell now and play it safe. But underneath, Silicon Image holds
the keys to a crucial piece of HDTV, a consumer electronics trend that will
play out in a big way over the next three or four years. And weakness in
other lines of business may only be short term.
Here’s a look at Silicon Images recent problems, and why they may not really
matter.
The Board
Four members of Silicon Image’s seven-person board recently walked out
because of a disagreement over whether another top executive, David Lee,
should be re-nominated to the board. (Ultimately, Lee pulled his bid.)
Silicon Image has fixed the problem by appointing new board members. To be
sure, you don’t like to see turmoil like this at the top, but the situation
seems to be stabilizing.
The auditor
The board shakeup sparked the resignation Silicon Image’s auditor,
PricewaterhouseCoopers, in part because most of the independent board
members had left. Since then, Silicon Image hired Deloitte Touche. So it
basically went from one “big four” auditing firm to another. No big deal.
The CFO
Assuming the role of finance chief in April, Darryl Slack recently took a
six-week leave of absence for undisclosed personal reasons. This didn’t look
good, given all the other turmoil at the top. But it is probably a non issue
for the company, at least.
The recent quarter
Silicon Image missed expectations in the most recent quarter – mainly
because of weakness in sales of storage-related products. Analysts
downgraded the stock to hold, and more investors sold. But this may only be
a short-term problem. “We believe this is temporary,” says Charlie Glavin,
an analyst with Needham. “We believe storage will rebound entering 2006.”
HDTV Technology
Silicon Image may have trouble with its storage related products. But it
holds the keys to the technology behind HDTV. Silicon Image invented a
standard called high-definition multimedia interface (HDMI) which connects
devices like set top boxes or digital video recorders to high definition
screens. Over the next several years, most TV sets will have to be HDTV
ready, and they will use the HDMI standard to get there.
“This standard is just really taking off in the market place,” says Silicon
Image chief executive Steve Tirado. “Silicon Image is the 800-pound gorilla
in this space. We have substantially all the intellectual property
associated with it.”
Silicon Image gets royalty payments for use of the HDMI standard. It also
designs communications chips applying the standard in consumer electronics.
Silicon Image also sells chip designs that put the same standard in personal
computers. And the Sony Playstation 3 will have two HDMI ports – another
opportunity for Silicon Image.
The bottom line: Below $10, Silicon Image trades for about twenty
times 2006 earnings, or about the same as its 20% medium term growth rate.
That makes the stock look somewhat cheap – since most growth stocks trade
for a price earnings to growth ratio (PEG) well above 1. Needham has a price
target of $13 on the stock. In contrast, most analysts are bearish and they
have already downgraded the stock to hold. This means sellers could be
washed out – making the stock a buy right here. Patient investors might wait
for prices closer to where Tirado bought, or around $9.05.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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