Bullish Call On Sigma Design

Sigma Design (SIGM) looks very bullish right now. Here is the quote from Down Jones News Wire:

NEW YORK (Dow Jones)--Nothing beats a monopoly. And life is even sweeter when simultaneously cozying up to a company that has a monopoly.

Just ask Sigma Designs Inc. (SIGM). In the area of Internet protocol television, or IPTV, Sigma enjoys an enviable position: a close relationship with Microsoft Corp. (MSFT), which has the dominant IPTV platform. Sigma supplies 75% of the chips that go into IPTV set-top boxes worldwide and its chips are, for now, the only ones that work with Microsoft's platform. Meanwhile, IPTV, the technology that allows phone carriers to offer TV service on their networks, has gotten a huge amount of interest as carriers look for
ways to boost growth. In the last two years, shares of the Milpitas, Calif.,
company have practically tripled. The stock doubled in 2006, hitting an all-time high of $29.12 in December. Despite Sigma's strong move up, Wall Street is still quite bullish about the company.
Sigma "right now benefits from a unique position ... the company has been the sole supplier of technology that is in high demand," said Tristan Gerra, an analyst at Robert W. Baird & Co. Gerra, who rates the stock at outperform, has no conflicts to report.
Sigma's stock has taken a bit of a breather in 2007, declining $3 amid concerns about the backdating of stock options. The company's investigation into backdating, which is still ongoing, delayed financial filings in December. Pundits fear possible management upheaval as a result of the investigation. The company also faces emerging competition. And because Sigma is dependent on a limited number of major customers - a single customer in Asia accounted for a quarter of total net revenue in fiscal 2006 - the company is subject to the delays and whims of a few.
But with the strategic outlook of the company, and IPTV, largely upbeat, analysts believe the company's stock price still has room to grow. At $27, Sigma shares are, on an absolute basis, at historical highs, but since the company's earnings have also improved, valuations are not necessarily rich.
Sigma is now trading at about 20 times Gerra's estimated fiscal 2008 earnings of $1.34 a share. That puts Sigma at the higher end of valuations within its group, which includes companies such as Broadcom Corp. (BRCM) and STMicroelectronics NV (STM). Analysts say Sigma's above-average gross margins and fast-growing top and bottom line justify its steeper price. Moreover, the company's valuation is within the 20-times to 30-times range that the group historically trades in.
Gerra has a price target of $30, or 22 times estimated fiscal 2008 earnings, while Jeff Schreiner at American Technology Research has a target of $34, or 25 times estimated fiscal 2008 earnings.

David Vs. Goliath

Sigma Designs' outlook wasn't always rosy. The company, originally a maker of computer video and graphic boards, transformed itself into a chip maker seven years ago. Times were hard initially. IPTV didn't garner much interest and the company sold its product to small- to medium-sized telecommunications carriers.

"We had secured a strong position in the market but the market was small," said Ken Lowe, Sigma's vice president of strategic marketing.
The whole semiconductor industry came under pressure in 2001 and Sigma's shares plunged to the $1 and $2 range. But things started looking up when Microsoft got into the IPTV market a few years ago. Top carriers started paying attention; IPTV hit the big time.
Sigma's singular focus on media processing paid off. While larger chipmakers such as STMicroelectronics and Broadcom played in various parts of the semiconductor market, Sigma plugged away in its niche, refining designs and courting customers.
"It's a David and Goliath," said Schreiner. "This is the one thing Sigma does and does well." Schreiner, who has a buy rating, does not have any conflicts to report.
The cable and telecommunications industries have, in recent years, been gripped by a feverish desire to expand into new markets. In the U.S., cable's success with the "triple play" of phone, Internet and TV service inspired phone carriers to come out with similar bundles. In Europe and Asia, where IPTV rollouts are far ahead of the U.S., phone carriers have looked to IPTV as a way to grow in an otherwise mature market.
Sigma's early entry into the IPTV market gave it a window of opportunity. But the party is ending soon. STMicro, a chip maker much bigger than Sigma, says its 7109 chip will be in some Microsoft-based IPTV set-top boxes in the second half of the year.
"Within a year we will have a very strong market share in IPTV," said John Rossi, vice president of market development in STMicro's consumer business unit. STMicro has extensive experience with cable and satellite companies and is a market leader providing chips to those sectors, he said.
Sigma knows its current dominance won't last forever.
"The market will get split up a little bit," Lowe acknowledged, but "we have roadmap in place that has us bringing out next generation capabilities later this year." The company is also bracing for lower industry prices as competition emerges.
What the company offers is a depth of experience, Lowe said. Also, as the incumbent IPTV chip provider, Sigma has the upper hand. Swapping out chips is no easy task. Customers have to tailor a set-top box's software to make it compatible, which takes months. To want to switch chip providers, "there has to be a substantial reason," Lowe said.
Anticipating increased competition, Sigma is looking into new markets. It supplies many of the chips for new-breed Blu-Ray DVD players and sells chips that go into high-definition television sets. Both markets are heating up this year.
(Ellen Sheng covers the cable and satellite TV industries for Dow Jones
Newswires.)
-By Ellen Sheng, Dow Jones Newswires; 201-938-5863; ellen.sheng@dowjones.com

(END) Dow Jones Newswires