Why Sigma Designs Inc. Shares Could Spike 35%

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Sigma Designs (NASDAQ:SIGM) popped 5% in pre-market trading Thursday after Needham upgraded the digital TV chip technologist from hold to buy.

So what: Along with the upgrade, analyst Quinn Bolton planted a price target of $5.50 on the stock, representing about 36% worth of upside to yesterday's close. So while momentum traders might be turned off by Sigma's year-to-date price weakness, Bolton's call could reflect a sense on Wall Street that the company's turnaround prospects are becoming too cheap to pass up.

Now what: According to Needham, Sigma's risk/reward trade-off is rather attractive at this point. "We expect stronger F2H15 revenue will largely be driven by the ramp of the company's 4K/UHD-capable SX6 SoC and FRCX frame rate converter solutions and the continued success of Z-Wave home control solutions," said Bolton. "With the company poised for a strong revenue ramp and a return to profitability in F2H15, we are upgrading SIGM shares to Buy from Hold." More important, with Sigma still boasting a rock-solid balance sheet and cheapish price-to-sales ratio of 0.7, the downside might be limited enough to bet on that upbeat outlook.