GIG Downs Despite Ups

It is too easy to make fun of Internet discussion boards. Either they’re as empty as vacant warehouses, or filled with ridiculous noise like a frat party. There are a few in the middle with good conversations, but even there a purposely discordant voice can derail most of the value. Just as powerful though, can be a single voice that asks a simple question that inspires a cascade of thoughts. One of the members of InvestorVillage.com sent me a back-channel message that produced a response of too many words with too little information. This blog post may just amplify that, but chronicling the thought process is valuable. The paraphrased question; “What do you see GIG’s upside is from here?“. The essence of my answer; “Up. But, I don’t know how far.” I should know.

GIG is the trading symbol for GigPeak. According to the company in techno-speak that is an improvement over previous descriptions;

GigPeak, Inc. is a leading innovator of semiconductor ICs and software solutions for high-speed connectivity and high-quality video compression over the network and the cloud. The focus of the company is to develop and deliver products that enable lower power consumption and faster data connectivity, more efficient use of network infrastructure, broader connectivity to the cloud, and reduce the total cost of ownership of existing network pipes from the core to the end user. GigPeak addresses both the speed of data transmission and the amount of bandwidth the data consumes within the network, and provides solutions that increase the efficiency of the Internet of Things, leveraging its strength in high-speed connectivity and high-quality video compression. The extended product portfolio provides more flexibility to support changing market requirements from ICs and MMICs through full software programmability and cost-efficient custom ASICs.

My simpler answer from my Semi-Annual Stock Synopsis;

GigPeak is a producer of high-end electro-optic communications switches. Through a variety of technologies, some of which have few moving parts, they are able to produce and sell the switches that allow the very high speed Internet connections that are considered necessities (that only a few years ago would have been considered luxuries).

Add software to the hardware and see that they provide a package that lets us stream videos, download massive software updates, and complain if we encounter buffering or have to wait three seconds.

If you think the Internet is growing, they’re in a good business. If you think people expect ever increasing speed and bandwidth, they’re in a good business. If you think they have few competitors because what they do is so boring and esoteric, then you understand why so few people want to understand them. Why research a tiny and volatile company with a product that’s difficult to understand when you can buy into a bigger company that’s easier to understand and less likely to do something unexpected?

That last piece of logic drives much of the investment world. They want big companies that are easy to understand where they can invest a lot of money. That’s why I invest in small companies that others may not understand. Buy them low when they’re overlooked. Sell them when they’re making so much money that they can’t be ignored by the larger investors.

Let’s get back to the question; “What do you see GIG’s upside is from here?“. Rather than simply say, “I don’t know.”, I’ll point out specifically what I don’t know that I hope to know.

My preferred method of estimating small companies doesn’t have a catchy acronym: the Present Value of Future Revenues Discounted for Risk. If you want more details, check out Dream Invest Live coveror buy my book, Dream. Invest. Live. – oh yeah, and read it, too.

The key variable is the Future Revenue. How much will the company make in the future? There’s a different answer for every quarter of their future, so to simplify the analysis I concentrate on the Future Revenue when they reach maturity. How much money will they be making when they become a recognized competitor in the industry and a desirable investment in the market? Those are subjective measures, but to simplify the analysis I look at their current competitors, or the size of the industry, or both. For a first guess, I look at the list of Related Companies in Google Finance. Most of them are in the $1.5B to $7.5B market cap range. GigPeak is currently at $0.17B; which suggests a range of about ten to fifty times their current valuation. Not bad for an investment, but without any timing. According to their earnings report, their revenues grew at 52%, and are expected to grow by at least 45%. I’ll assume a growth rate of about 41% because that doubles the revenues every two years, a bit less than what they are doing now. At a double every two years, the company and hopefully the stock will reach eight-fold growth in six years, and 16 in 8, 32 in 10, 64 in 12. Somewhere in there they’ll probably plateau – unless something changes.

GigPeak is known for changing.

GigPeak’s history is convoluted enough that it would make a book. Its changes to come will probably make another one. That tendency could raise the estimates, but there’s little reliability in such projections.

There’s also little reliability in any projections. GigPeak may gain a premium if they outcompete their competitors. GigPeak may implode if a competitor, especially one with more resources, creates a superior product and technology. It’s harder to imagine Internet growth slowing, but this is a strange world.

I’m not in a hurry to improve my estimates. Even if I found better projections for the company, its competitors, and the industry, technology and the markets are changing quickly enough that the added details may be moot. If I estimated a twenty-fold increase and was off by half, then I’d have either a ten-fold increase (yay!) or a forty-fold increase (YAY!). Both are good returns on investment. Neither returns me to retirement without help. Any further analysis would simply be enabling the more anal side of my psyche.

Today, GIG closed at $2.53. According to Google, that gives them a remarkable Price/Earnings ratio of 148, about ten times higher than most investors think is reasonable. That’s what happens when a company turns from unprofitable to profitable; E ~ 0 and math gets a headache. The Price/Sales ratio is 4.28, a little high compared to its competitors, a little low (I think) for growing companies with disruptive technologies. I’ll feel more comfortable with my estimate after I find a better value for Future Revenues and the size of the industry. Until then, I’ll continue to Hold.

Until then, I’ll also continue to appreciate fellow investors who ask pertinent questions without getting impertinent.

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About Tom Trimbath

consultant / entrepreneur / writer / photographer / speaker / aerospace engineer / semi-semi-retired More info at: https://trimbathcreative.wordpress.com/about/ and at my amazon author page: http://www.amazon.com/-/e/B0035XVXAA
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