Is MIPS Technologies a Rule Breaker?

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: MIPS Technologies (Nasdaq: MIPS). Is this designer of microcontrollers for digital TV and other consumer devices the real thing? Let's get right to the numbers.

Foolish facts

Data current as of Nov. 10.

For years, MIPS has been designing the brains of digital consumer products. The long-term growth story here depends on the company winning contracts to design chips for entirely markets. CEO Sandeep Vij seems confident that MIPS will make the transition.

In an interview with Dow Jones last month, Vij said MIPS' multi-core designs hold advantages over mobile chips from ARM Holdings (Nasdaq: ARMH). With support for the Android operating system, MIPS could be positioning itself for a massive dose of smartphone-fueled growth.

"Lots of momentum in the chip IP business. MIPS designs should make their way into cell phone and especially tablets. The Street is finally waking up to what [ARM Holdings] and MIPS do -- they understand they have the high growth prospects of the chip business without the massive capital expenditures," wrote Foolish investor ibankingcrooks last month.

It certainly looks that way. In its fiscal first quarter, MIPS' $0.17 per share in adjusted earnings beat the consensus view by $0.07. Revenue soared more than 50% to $22.5 million. Wall Street, meanwhile, is calling for earnings to grow by more than 18% annually for the foreseeable future.

The elements of growth

Source: Capital IQ, a division of Standard & Poor's.

Looking at this table, I can understand why Wall Street is optimistic. Let's review:

• Normalized net income growth may be growing inconsistently, revenue growth is accelerating. That's an excellent sign; the mark of a stock that's likely to command a premium valuation as more Big Money investors discover it. (Institutions owned 55.6% of the shares outstanding as of this writing.)
• Revenue growth is also outpacing receivables growth, a sign of management efficiency. A 28.3% return on capital over the past year confirms that view.
• Shares outstanding have remained stable thanks to healthy cash flows. In the first quarter alone, MIPS generated $6 million of free cash flow -- more than a third of the $17.2 million in FCF the company produced for all of fiscal 2010.

Competitor and peer checkup

Source: Capital IQ, a division of Standard & Poor's. Data current as of Nov. 10.

MIPS has set itself apart as the growth story in an industry that's vacillated between boom and bust for years. Not even ARM Holdings, its closest comparable competitor, gets close.

Grade: Sustainable
Years could pass before the gap narrows. Why? Smartphones are this generation's PC. Handset makers need high-octane processors to perform the sort of tasks users expect -- from number crunching to video recording. MIPS' low power, multi-core designs appear to address this need as well as anything.

Is that enough to make the stock a Rule Breaker? No, but it's a great start. I like the possibilities enough that I'm rating the stock to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like MIPS Technologies at these levels? Let us know what you think using the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

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