After getting beaten up over the past two months, shares of GPS chipset maker SiRFTechnology (NASDAQ:SIRF) plunged an additional 20% on Wednesday, after the company released its second-quarter earnings. I wonder whether the selling has been overdone.
SiRF sells chipsets and related software to provide GPS functionality in automobiles, mobile phones, and other electronic devices. The company features an A-list of customers, including GPS makers Garmin (NASDAQ:GRMN), TomTom, and Lowrance, PDA makers including Hewlett-Packard (NYSE:HPQ), Palm (NASDAQ:PALM), and Research In Motion (NASDAQ:RIMM), and cell-phone manufacturer Motorola (NYSE:MOT). General Motors (NYSE:GM) also uses SiRF in its OnStar navigation system.
SiRF protects its technology with numerous patents, and licenses its technology to other companies. Those licensing fees accounted for about 5% of total revenues of $57 million in the latest quarter. While the competition can't be ignored, gross margins are strong at around 55%, and revenues have been booming. Sales grew 40% from 2004 to 2005, reaching $165 million -- and in the first six months of this year, sales have totaled $110 million.
Despite all of its past success, SiRF is not standing still. It continues to develop its technology and has made a number of small acquisitions to help with its endeavors. Late this year, it should see sales ramp up on a chipset called SiRFLink, which combines GPS and functionality for Bluetooth, a wireless specification that allows for communication between devices such as PDAs and mobile phones.
Clearly, though, there must be some holes in the SiRF story, because 16% of the float is sold short. One negative is that accounts receivable have taken an alarming leap over the past two quarters, standing at more than $25 million at the end of June, compared with less than $12 million six months earlier. Is SiRF extending overly favorable terms to customers to get its chips out the door? Another risk factor is that sales are concentrated at a small number of customers -- and one customer accounted for a full 42% of revenues during the first quarter of this year.
Nevertheless, the stock may be worth a look at its current price of around $19 per share -- down from more than $40 earlier this year. While the automotive GPS market is well established, the market for GPS in mobile phones and PDAs has a lot of growth ahead. For investors who can tolerate some risk, the end market growth -- combined with SiRF's competitive position -- may make for a winning investment.
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Fool contributor Dan Bloom doesn't own shares of any company mentioned in this column. He welcomes your comments.
