Here's Why Entropic Communications May Be Worth a Look

Entropic Communications' (NASDAQ: ENTR  ) stock has had a pretty rough couple of years following the initial success of its IPO. Going public at just north of $7 a share in 2007, the stock trades at $3.25 as of this writing -- just 20 cents above its 52-week low. The company builds semiconductor chips for set-top boxes, broadband access, home networking, and Direct Broadcast Satellite Outdoor Unit solutions. After a gut-wrenching drop from its 2011 peak of just north of $13, shares may be set to rebound.

Another disappointing quarter leads to lows
In the company's most recent quarter, it reported revenues of $55.7 million (down about 25% year over year), slightly edging past consensus, but on the bottom line it reported a loss of $0.17 per share -- a penny below consensus. These results aren't in themselves "bad," but the forward guidance of $53 million to $55 million on the top line and a loss of $0.10 to $0.12 per share on the bottom line both missed consensus of $55.3 million and $0.10, respectively.

All told, the results and guidance aren't too wildly off from the already pessimistic expectations. However, to guide to or above consensus when the stock is already hated just leads shareholders to give up, and it gives short-sellers more fuel and leads to continued selling pressure in the shares. However, now that you understand why the shares now trade where they do today, it's time to look at why things could get a whole lot better for the stock.

Flush with cash, business on cusp of recovery
Entropic sports a market capitalization of $295 million, but it has about $106 million in cash and marketable securities and no long-term debt, meaning that over a third of the market cap is just sitting there as essentially cash on the balance sheet. Of course, the company is currently not profitable and on track to lose about $0.44 a share this year. While this is ugly, the company has more than enough cash to get through this rough patch.

Indeed, the company is banking on two big "game changers" for its business to turn the corner. First, the company is expecting that design wins in Comcast's (NASDAQ: CMCSA  ) X1 and X2 set-top box solutions to begin to ramp in Q4 with the ramp becoming material throughout 2015, helping the company to drive revenue growth and narrow that loss. Next, the company expects its next generation digital channel stacking switch to begin ramping materially in mid-2015 and then becoming much bigger during 2016.

If Entropic can deliver on these products, and if the ramps are as significant as claimed, then 2015 should see a nice reduction in the loss that the company will see this year (consensus is at a loss of $0.24 a share) and then a return to profitability during 2016.

Foolish bottom line
Entropic is not a story for the impatient, nor is it one for those not willing to take a little bit of a wild ride with a fairly risky small-cap semiconductor name. However, given that the company has a good amount of cash and should see its business improve dramatically over the next couple of years, it could be just the kind of stock that investors looking to profit from a major turnaround may want to -- at the very least – put on their watchlists.

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