Trident Microsystems (NASDAQ:TRID) is a small semiconductor company that makes chips for digital TVs that decode and process the signals sent to the TV from set-top boxes and DVD players. If this process is performed poorly, the picture on even the most expensive TV will look crummy. Judging by Trident's revenue growth (73% year over year in its latest quarter), its chips do a good job. Still, I have to wonder whether investors aren't overly optimistic in pricing this stock at 8.6 times revenue.

It's not hard to understand why some investors are excited. The market for advanced TVs is forecast to grow by 30% annually through 2010. Furthermore, Yahoo! Finance lists Trident's forward P/E at 14. But determining forward P/E ratios is a lot like forecasting next week's weather -- you basically take a look around, then make your best guess. We do know that Trident has strong positions with powerful companies in the TV business, including Sony (NYSE:SNE), Samsung, and Sharp. In fact, during a conference call, management said that these three firms account for 70% of its revenue. (Anyone else think there's some risk in that kind of customer concentration?).

My main problem is that I doubt Trident's differentiation is durable. It has a lot of competitors, and these companies get a new chance to compete every year when the TV manufacturers design their new products. Trident has to shine again and again and again. Although some of its competitors, like Genesis Microchip (NASDAQ:GNSS) and Pixelworks (NASDAQ:PXLW), have slipped up, as long as they stay in business, they always get another go-round. Furthermore, the market has also attracted larger companies like Broadcom (NASDAQ:BRCM) and STMicroelectronics (NYSE:STM). It's hard for me to believe that these deep-pocketed rivals can't develop competitive chips.

I certainly don't want to talk you out of your Trident shares, provided you have a good understanding of this company, and how its management team and products will continue to keep the competition at bay. I don't have this full understanding, so Trident looks like a risky stock to me.

For related Foolishness:

Do you think you could pitch your favorite stock -- or ditch your least favorite -- in less than 27 seconds? That's what we're doing over at Motley Fool CAPS. Check out our new stock videos.

Fool contributor Dan Bloom owns shares in Genesis Microchip. The Fool has a disclosure policy.