Can Entropic Buck the Trend?

In my previous article on Entropic Communications (Nasdaq: ENTR  ) , we saw that the company posted a revenue surge but failed to meet Street expectations, sending its shares lower. The stock has since traded in that same range, but let's see if Entropic has the potential to provide us with some relief going forward.

Positives vs. negatives
First, let's look at the positives. Entropic has managed to compound revenue at an annual rate of 18% over the past three years. Moreover, its revenues have grown by a staggering 91% from last year on the back of booming sales of its MoCA (Multimedia over Coax Alliance) enabled chipsets . The company more than doubled its earnings in the last quarter from a year ago and continued innovating new products, the most popular one being the latest version of MoCA, which aims to provide improved performance at lower costs.

The downside came in the form of low shipments to one of its most important customers, Verizon (NYSE: VZ  ) , which adjusted its inventories after seeing weak demand for Entropic's MoCA-enabled FiOS service. This resulted in a revenue drop on a sequential-quarter basis, and net income halved from the quarter before.

So is the loss of one of its most prestigious customers enough to dismiss a company that's making active moves to expand its business? When we consider that Entropic has extended its business with Intel (Nasdaq: INTC  ) to develop designs for its set-top boxes and inked new partnerships with Zoran (Nasdaq: ZRAN  ) and a host of other companies to develop new products, the previous quarterly results appear to be just a flash in the pan. However, how well the company deals with the Verizon loss will go a long way in determining its-and its shareholders'  future.

With all these concerns, how cheap is the stock now? Let's take a look at how the company is valued against its peers.

Company TEV/EBITDA (TTM) Trailing P/E (TTM) Forward P/E (NTM)
Entropic 4.4 5.0 10.9
Broadcom (Nasdaq: BRCM  ) 15.5 20.1 12.0
Sigma Designs (Nasdaq: SIGM  ) 21.4 NM NM
LSI (NYSE: LSI  ) 7.8 59.2 11.3

Source: Capital IQ.

Entropic is darn cheap when compared with the other chipmakers in the field. But the gap between trailing P/E and forward P/E grabs my attention. The company failed to meet estimates in the just-concluded quarter and lost a major share of its revenue from one of its most important customers. It seems these factors were playing in analysts' minds when estimating next year's earnings.

Although the company has been making some moves to pump up revenue with new partnerships and improved products, it might make sense to wait for the next quarterly results to take better stock of the situation at Entropic. We need to know how much Verizon's loss has affected the company. The fallout will, in all likelihood, be reflected in the next earnings release.

To stay on top of the latest developments at Entropic, add it to My Watchlist.

Fool contributor Harsh Chauhan doesn't own any shares in the companies mentioned in this article. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of Intel. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 30, 2011, at 2:19 PM, noargos wrote:

    Nice article by Harsh Chauhan. One thing the author has failed to mention, (which may or may not have been intentional), is Entropoic's orders from Verizon was magnified last quarter as a direct result of a strike by it's installation personnel; the very people who install the Verizon FIOS systems that utilize the "anyroom" feature we are seeing heavily advertised of late (these are MoCa enabled chipsets). I wonder how much of the strike impacted earnings and for that matter, how much consideration this got in forward estimates from the analyst community. I guess we'll find out on Thursday..

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