Casting a quick glance at media-chip designer Sigma Designs (Nasdaq: SIGM) today, you'd think its headquarters were on fire or something. The stock is down by more than 12% on about 10 times the average trading volume, so there must have been something very wrong about last night's earnings report.

Well, Mr. Market clearly sees it that way. Fourth-quarter sales of $71 million with $0.32 of earnings per share was in line with analyst expectations and management guidance, so that wasn't the issue.

Looking forward to the first quarter of fiscal year 2012, Sigma sees sales topping out at $65 million. And therein lies the rub: The midpoint of management's guidance sits below the lowest of the nine analyst estimates available. (Sigma doesn't do earnings guidance, so no finger-pointing at the bottom line!)

But then you're not seeing the forest for the trees. That first-quarter guidance looks terrible out of context -- but there is a context.

If you take that forecast as gospel and apply a run-rate of $62.5 million in sales per quarter throughout fiscal 2012, you'd end up with $250 million of annual revenue. The current analyst view of that metric is $287 million. But the year isn't supposed to play out that way.

The first half should see a temporary dip with a much stronger second half. Sigma's media chips are moving from a single-tier model of all-around models toward a split model with high-end, high-cost chips and a value line that target different end markets. That leads to a brief period of order adjustments, which is why the first half of 2012 should be slow. But at the end of it all, Sigma has the ability to target a wider range of markets, which should mean significantly higher sales down the line.

And if you think that value-priced chips will dominate the product mix and damage margins, marketing VP Ken Lowe assures us that the value line also is cheaper to manufacture, so margins should stay firm.

Sigma is a major player in digital set-top boxes with leading system builders Motorola Mobility (NYSE: MMI), Cisco Systems (Nasdaq: CSCO), and Samsung on its customer list. Telecoms with Internet-based TV services are a particular market of interest, as those system partners are shipping Sigma-based boxes to IPTV solutions like AT&T's (NYSE: T) U-Verse. Verizon (NYSE: VZ) is even expanding beyond IPTV by using Sigma's chips in new home monitoring services.

As digital TV services expand worldwide, Sigma is perhaps the purest play on that market. So the next couple of quarters will be a little slow -- but the weakness won't last. Today's price drop is nothing but a huge "buy me now!" flag on this five-star CAPS stock.

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