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May 26, 2000
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Based on publicly available information (at least what I have been able to find) the recent slam in the stock price is due to the following factors:
1. Problem with supply chain.
2. Aggressive competitive pricing.
3. Uncertainty about the future of new high end products.
4. Uncertainty about the future of other (set-top box) new products.
5. Declining margins.
6. Management credibility.
Here's my take on the issues.
1. The problem of not being able to get enough components from suppliers affects the top line - revenues. According to KY Ho, there is a "growing worldwide computer component shortage" and other companies are facing similar problems (among them Cisco, Palm, Motorola, Nortel, and Qualcomm). If this is true, the problem is temporary and revenues should come back strong later in the year. If this is not true, and management is hiding the real reason for flat revenues, we have a credibility problem - more on that later.
2. The issue of aggressive competitive pricing is being blamed on S3 dumping chips on to the market as they exit the business. If this is true, this problem is also temporary. By nature, computer chips have always declined in price over time. For that reason, companies in this sector must continuously introduce new products in order to avoid obsolescence. ATYT has been able to do this in the past and I see no reason they will not continue to do so. Therefore, as the price of existing products declines, ATYT should be able to replace them in order to maintain margins.
3. The uncertainly surrounding the future of the company's high end products comes down to the question of whether or not the company can produce and sell enough quality high end chips. IMO the answer is yes. There is no doubt that ATYT has not played a leading innovative role in the high end (gamers) market. However, I believe that the company is capable of doing so if management decides this market is worth pursuing.
4. On the issue of other new products, the company has formed powerful alliances with companies leading the charge in the "set-top box" market � notably Sony. This market should be huge in the next few years. It is difficult to determine if ATYT will be successful in this area. Based on past performance of current management, my guess is that the company will be successful.
5. Declining margins are of concern. Management claims the projected decline in margins (from about 33% to 21% in the 3rd quarter) is temporary. If they are right about issues 1 and 2 above, then margins should go back to the mid 30's by fiscal 2001. If this is not true, and management is hiding the real reason for falling margins, once again, we have a credibility problem - more on that later.
6. ATYT is a company that has been around for more than 15 years. During that time they have produced quality products and have become the largest graphics chip supplier in the world. The top management have led that development right from the start and hold a significant stake in the company. As far as I know, management is of top quality and integrity. From everything I have read about the company in the past the only criticism about management is that they are lacking when it comes to "guiding" the market on the performance of the company. As far as I'm concerned, management could totally ignore every ANALyst on the street as long as the company continues to be profitable.
Now let's look at the positives about this company:
1. Sales over $1B.
2. $143M in cash (end of Q2).
3. No debt.
4. Average ROE of 32% over the last 4 years.
5. Net margins over 10%.
The worst case scenario for any company is bankruptcy. Being an established company selling real products and making real profits, that is not likely to happen any time soon for ATYT. Since the company has no debt and its cash alone is almost enough to pay for all its liabilities I can't see bankruptcy being even remotely possible.
The second possible scenario is that the stock price will be so severely hit that the company becomes a takeover target. That may or may not be good for shareholders depending on who the takeover company is. In this scenario, even if shareholders decide the stock of the takeover company is not worth holding, ATYTs stock price is likely to spike up giving (small) shareholders an opportunity to sell.
The third possible scenario is that revenues and profits will stagnate and the stock price will go nowhere. I'm willing to give it 2 years for this to play out. If this happens, then I'll take my small capital loss (I'm in at an average cost of about Cdn$15) and move on.
Finally, there is a pretty good chance that what we are seeing is a temporary blip and a few months or years down the road we will be looking back and kicking ourselves for not buying more shares at the current prices.
I'm willing to bet (a modest) portion of my portfolio on the last scenario. Being a long term investor, daily stock gyrations do not concern me. I believe there is a reasonable likelyhood the stock price will recover in the future to provide patient shareholders a decent return. Call me crazy but from what I've read I'm willing to bet that current management has what it takes to whether the current storm.
If I'm wrong, I lose a few thousand dollars on one stock. If I'm right, I will make a heck of a lot more. TIME WILL TELL.
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