On Tuesday night, highly focused semiconductor maker Sigma Designs (NASDAQ:SIGM) will report Q3 2006 results. Let's set the table and see whether it's time to join the buffet headed by this single-minded video encoding and decoding company.

What analysts say:

  • Buy, sell, or waffle? Ten analysts follow Sigma Designs, and eight of them have a buy rating, with the other two content to hold. In the Motley Fool CAPS community, it's a five-star stock with 89 outperform ratings against only four underperforms.
  • Earnings. Analysts are looking for earnings of $0.12 per share, 50% above last year's $0.08 and twice the $0.06 of the previous quarter.
  • Revenues. Sales are another story. If Wall Street is right, we should see a 172% revenue boost to $23.1 million.

What management says:
In the latest earnings report, CEO Thinh Tran talked about reaching an "inflection point in demand for IPTV-based deployments at a widening set of telco carriers as well as Sigma's dominance in this market." The company believes its products have become the de facto IPTV standard, and that it stands to benefit from every ounce of growth in that market.

What management does:
Sigma is in the enviable position of improving operating margins while increasing its research and development budget each quarter. If that wasn't good enough, a strong balance sheet means that the company gains more on investments and their interest than it spends on taxes, so net margins are even higher. Sweet.

Margins %

1/05

4/05

7/05

10/05

1/06

4/06

Gross

69.7

69.5

68.6

68.1

65.7

61.0

Op.

4.0

(2.6)

(5.4)

(6.2)

(4.1)

1.2

Net

5.9

3.2

(0.2)

4.5

5.7

4.9

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
The last time Sigma Designs reported earnings, I said that analyst coverage would likely increase as Wall Street sits up and takes notice of the company's brilliant results and bright prospects. Since then, four more firms have jumped aboard the bandwagon, and the stock price has appreciated by more than 60%.

Is it too late to join the love train? Well, no -- but this probably isn't the ideal buy-in point, either. You see, Sigma is priced to perfection, and the price will only hold up as long as the company performs beyond its own wildest dreams. No company is really worth more than 12 times trailing revenues or 16 times tangible book value in the long run.

You've seen this before if you follow companies like Google (NASDAQ:GOOG) or Apple (NASDAQ:AAPL): A minor stumble leads to a massive sell-off, even though future prospects remain just as bright as before. That's what you're waiting for here. If this week's report comes in at or just above expectations, the market would take it as a sign of weakness and the ensuing drop in stock price would present a much better entry point. It happens to every company sooner or later -- if not this time, then maybe next quarter, or at the end of that options grant review. In other words, hold your horses.

Major customers:

  • AT&T (NYSE:T)
  • Cisco (NASDAQ:CSCO)

Competition:

  • Texas Instruments (NYSE:TXN)
  • Broadcom (NASDAQ:BRCM)

AT&T is a former Stock Advisor recommendation. Try a free 30-day trial to any of our services to see which of our Foolish shoes fit you best.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like. Foolish disclosure is always one step ahead.