Shortly after chip maker Techwell (NASDAQ:TWLL) went public earlier this year, I wondered if its relatively poorly received IPO was an opportunity to buy a growth company at a good price. The answer appears to have been yes. Techwell reported earnings for its fiscal third quarter last Thursday, and a quick glance at the stock price chart shows that the market has been cheering the report. Let's dig in to see what investors liked so much.
Revenue for the third quarter reached $15.1 million, which was more than 50% higher than the $9.9 million recorded during the same period last year. Techwell's three biggest product categories are semiconductor chips used in security surveillance, video decoder applications, and LCD displays. The security surveillance chips were the standout performer, growing 83% year over year and accounting for $7.3 million in revenue. These chips receive video signals from surveillance cameras and then perform various useful functions, such as converting the signals into a format that can be saved to a hard drive. The next fastest growth came from LCD display products. That revenue grew by 63% to $2 million. Finally, sales of video decoder products grew by 31% to $5.7 million.
Gross (58%) and operating margins (29%) expanded strongly from last year's levels (49% and 13%, respectively), so it isn't too surprising that net income leapt upward as well. Net income was $4.5 million, or $0.21 per diluted share, compared to just $1.3 million, or $0.07 per diluted share, in Q3 last year. Net margins were very impressive, reaching nearly 30%.
The only negative development that I found in the financials is that inventory doubled from the previous quarter. During the conference call, management stated that the inventory increase was planned and will provide more flexibility to meet future demand. Since the inventory increase was not matched by a similar increase in accounts receivable, I am willing to accept this explanation for now, but I would definitely keep an eye on this trend.
Techwell is obviously doing some things right, but if you are considering an investment now, future developments are more important than its past performance. There are many companies that can and do provide chips that perform functions similar to Techwell's, including Texas Instruments (NYSE:TXN), Micronas Semiconductor, Trident Microsystems (NASDAQ:TRID), Zoran (NASDAQ:ZRAN), and others. Furthermore, design cycles in consumer devices are usually short, so opportunities for competitors to lure a customer away from Techwell arise frequently.
The valuation may show that the market doesn't expect negative developments. The stock's trailing-12-month P/E ratio is about 39, and the price-to-sales ratio is 8. These values are high, but not necessarily unreasonable for a company growing as fast as Techwell. While my inclination is to wait for a better price, there is no assurance that the share price will drop meaningfully, so these shares may be worth a look for aggressive growth types who believe Techwell can continue to fend off the competition.
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Fool contributor Dan Bloom doesn't own shares of any stock mentioned above. He invites your comments at [email protected]. The Fool has a disclosure policy.
