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Why Sigma Designs, Inc. Stock Jumped 39% in June

By Anders Bylund – Jul 10, 2015 at 6:45AM

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Sigma Designs is roaring back from a deep abyss, taking aim at two excellent growth markets. Will the recent momentum continue driving the stock even higher?

What: Shares of multimedia microchip designer Sigma Designs (SIGM) soared 39% higher in June, according to S&P Capital IQ data. The dramatic jump rested on a fantastic earnings report, followed by a slew of positive analyst notes.

So what: Sigma's first quarter saw sales rising 49% year over year. Adjusted earnings more than doubled, to $0.09 per share, leaving analyst estimates $0.08 behind. CEO Thinh Tran explained the strong results with high demand for smart TV chipsets alongside solutions for Internet of Things devices.

Now what: Internet of Things sales more than doubled from the year-ago period, and smart TV product sales more than tripled. Sigma Designs is riding a couple of powerful growth waves here, at just the right time. Smart TV sets are becoming the industry standard for a global consumer market that's getting addicted to streaming video services, and the Internet of Things sector is expected to create $19 trillion of economic value during the next five years.

Sigma Designs is hitching its wagon to all the right horses right now. It shows on the stock chart, too. During the last year, Sigma shares have jumped 150% higher.

Smart TV sets are crucial to Sigma Designs' current business plan. Image source: Sigma designs.

That being said, you should remember that Sigma Designs actually is climbing back from a deep, dark hole. This company has struggled to find a place in the modern media technology world, reporting negative cash flows and falling sales as recently as last year. Cash flows and sales are still down in the last five years, and the modest 10% return in that span lags the overall markets by a wide margin. And the company is not shy about diluting the holdings of existing shareholders, if that's what it takes to meet short-term earnings targets.

I'm bringing up this shaky history to remind you that Sigma Designs hasn't always fired on all cylinders. As perfect as its market position looks right now, the company doesn't always deliver when the chips are down. June's fantastic momentum may continue pushing Sigma Design shares even higher, and the company may indeed become an established giant as its favorite markets continue to grow. I just wouldn't bet the house on it.

Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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