Please ensure Javascript is enabled for purposes of website accessibility

Is Sigma Designs Wearing Thin?

By Rich Smith - Updated Apr 5, 2017 at 8:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The quarter wasn't pretty, but there may still be a silver lining.

Well, at least it didn't screw up twice.

That is, sad to say, about the only nice thing I can say about Sigma Designs' (NASDAQ:SIGM) third-quarter earnings report, released Tuesday. As you may recall, SD had already prepared us for a grim report last month when it issued a sales warning, advising that it would "miss" previous guidance by about 20% as its sales fell 30% year over year. In fact, as we learned Tuesday, sales fell "only" 29% -- to $46.8 million, as opposed to the $46.5 million previously expected.

Thanks heavens for small blessings
Frightfully small, in light of the rest of the news. Gross margin eroded by nearly 700 basis points, and operating margins simply fell off a cliff, dropping from just under 34% to a mere 7.7% margin. For context, that's comparable to the kinds of margins that rivals Broadcom (NASDAQ:BRCM) and ST Micro (NYSE:STM) post, as opposed to the Texas Instruments-sized (NYSE:TXN) margins SD used to be pulling down.

Result: Earnings plunged more than 80% to land at $0.14 for the quarter.

What's management got to say for itself?
Management recited its usual litany of promises on how it will pull out of this slump, boasting of its leading position in Microsoft's (NASDAQ:MSFT) Mediaroom, the integration of it chips into Sony (NYSE:SNE) Blu-ray players, and more generally, how it is "executing a number of strategic growth initiatives designed to result in additional future revenue streams" from cable-based IPTV, home networking market, and HDTV. Those unfulfilled promises, however, are wearing thin.

Meanwhile, the buy thesis for this stock continues to rest not on its ability to grow like a weed, but rather on the simple fact that it's got a fat bank account and a cheap stock price (roughly $7.30 per diluted share in cash and short-term and long-term marketable securities, for a $9 stock).

Foolish takeaway
Unless and until SD masters the concept of "underpromise, overdeliver" (and not the other way around), this stock remains in the incongruous and unenviable position of being an extreme value play, somehow occupying a slot in the Motley Fool Rule Breakers portfolio.

Personally, I cannot fathom why Sigma Designs still occupies a place in our pantheon of hypergrowth stocks ... but at the same time, I can't  imagine it being sold at this deep a value.

Cue Clash, and sing: Will it stay or will it go (now)? Take a free trial of Motley Fool Rule Breakers and learn whether our growth stock team still thinks SD can turn things around.

Fool contributor Rich Smith does not own shares of any company named above. Sigma Designs is also a Motley Fool Hidden Gems Pay Dirt selection. Microsoft is a Motley Fool Inside Value pick. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Sigma Designs, Inc. Stock Quote
Sigma Designs, Inc.
Microsoft Corporation Stock Quote
Microsoft Corporation
$288.55 (2.21%) $6.25
Texas Instruments Incorporated Stock Quote
Texas Instruments Incorporated
$182.15 (2.50%) $4.44
Sony Corporation Stock Quote
Sony Corporation
$85.36 (2.20%) $1.84
STMicroelectronics N.V. Stock Quote
STMicroelectronics N.V.
$37.82 (4.85%) $1.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/10/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.