Can Pixelworks play catch up with Genisis?


Experienced member
By Thom Calandra,
Last Update: 12:32 PM ET Dec. 17, 2001

SAN FRANCISCO (CBS.MW) -- Shares of Pixelworks, which makes chips for flat-panel computer screens, are poised to play catch-up with a successful competitor, says one money manager.

Oregon-based Pixelworks (PXLW: news, chart, profile), after warning earnings would be lackluster in the fourth quarter, lost one-quarter of its market value back in October. At the time, analyst Mark Grossman at SG Cowen downgraded the shares to "buy" from "strong buy."

Two months later, it's like that never happened. The stock has regained its loss and then some, mostly as semiconductor companies drive the stock market rebound this autumn. In the meantime, Pixelworks unveiled a plan to buy a chipmaker with a foothold in China. The news last week knocked back the Nasdaq-traded shares by a few dollars, and they now sell for $17.

ONe analyst, Brian W. Foote at New Jersey-based Ryan, Beck & Co., says investors hit their "sell" buttons too quickly. The purchase of China and California-based nDSP gives Pixelworks firmer grounding in the business of making flat-panel television screens, Foote says. He sees Pixelworks gaining 40 engineers, many of them in China, from the purchase. China is where a third of all television sets are made. Foote in a research report said Pixelworks is paying an average of $500,000 for each nDSP engineer, or a little more than half what its own engineers, 100 in number, generate in sales each year.

Together, Pixelworks and nDSP will be able to mass produce the video-processing chips used in flat-panel TV displays, Foote said. The analyst was unavailable for comment Monday morning.

John M. Romero, who heads tiny Tango Capital Management in McLean, Va., says Pixelworks shares could start making up ground on Genesis Microchip (GNSS: news, chart, profile), another flat-panel chipmaker whose stock chart looks like a moon shot. Genesis, located in the heart of California's Silicon Valley, is merging with Sage Inc. (SAGI: news, chart, profile), another California company.

Romero uses Genesis Microchip as his guide to the rapid growth in the integrated circuits found in high-definition TVs, DVD players, multimedia projectors and Web-based appliances. Market researchers, who are known to exaggerate, see 46 million shipments of flat-panel circuits in the year 2005, up from 6.2 million last year.

"Flat panel monitors that formerly cost $1,000, which can now be fetched for $350, don't hurt the consumption pattern," says Romero, who manages less than $10 million of financial assets for clients. "Flat-panel displays are compelling when you consider the energy and space they save along with their hip look and feel."

One market research firm, DisplaySearch, increased a 2001 forecast for so-called liquid-crystal display shipments by 20 percent, according to Romero. He points to research house and broker S.G. Cowen, which recently said Wall Street earnings and sales forecasts for Genesis and Pixelworks have yet to account for the jump in business.

Of course, Wall Street rarely misses a trick when it comes to inflated market research. C.E. Unterburg's analysts 12 days ago raised their share-price target for Wall Street darling Genesis to $70, mostly because the numbers-crunchers think the company will enjoy a blockbuster December quarter if supply channels come through. Sure enough, Genesis shares were flirting with $71 Monday, an all-time high for this momentum stock. See's analyst ratings page.

The combined Genesis-Sage could enjoy 65 percent or greater market share in flat-panel chips, according to a CIBC World Markets report. National Semiconductor (NSM: news, chart, profile) also makes circuits for flat panels. Pixelworks' piece of the market for flat-panel chips is very small, the fund manager concedes.

Romero, using earnings estimates, has Genesis shares selling for a 2002 price-earnings multiple of 65 or so, with 100 percent revenue growth in the next year, thanks to the Sage purchase. No bargain there, though. The shares have risen more than 150 percent from their October lows.

Semiconductor and chip-equipment stocks have about doubled the gain of the Nasdaq Composite, on average, since early October. The Philadelphia Semiconductor Index, the so-called SOX (SOX: news, chart, profile), is up almost 60 percent since its low of Oct. 2 as investors bet on a sharp rebound in technology spending for the summer of next year. The technology bubble, it appears, is alive and well.

Tiny Pixelworks, meanwhile, should increase sales by 40 percent next year, Romero says. Pixelworks' market capitalization of $700 million is half that of Genesis. "It really does appear cheap," says Romero, who owns the shares.

"Pixelworks also has stronger gross margins (a five-year average 65 percent vs. 55 percent at Genesis) and trades at almost half the price-sales ratio of Genesis," Romero said Monday morning. "Regardless of whom you own, the market is expected to continue its torrid growth well into the next couple of years. The only wild card is the growth rate for these companies."

Foote at Ryan, Beck adjusted his earnings forecast for Pixelworks based on the nDSP acquisition. He expects Pixelworks to earn about 45 cents a share next year, giving the company's shares a forward price-earnings multiple of about 38. The average 2002 earnings seen for Pixelworks by a group of five Wall Street analysts is 38 cents.
GNSS still amazes me at its strength.On a day when the sector is down and so many other semis are down, this stock is slightly up. It always quickly likes to run $5 when it takes out a decade number and its been knocking on the door of $70 for the last few days.

I certainly will have this on my watch list just incase.Check out the graph on