Fool.com: ESS Technology [Special] June 10, 2002

Trading at $15.73 as of June 7, 2002

To DVD or not to DVD? That once was the question. With botched video formats like Betamax and the laser disc still fresh on the failure list, it was easy to be skeptical on the prospects of DVD early on. Well, the question mark has become an exclamation point over the years.

Just as you're seeing video rental chains yield more and more space to DVD titles, the players have become the latest "must-have" home entertainment appliance. The Consumer Electronics Association reported that DVD player sales in April were more than double that of VHS players stateside. Nikkei Market Access is expecting 53 million DVD players to be sold this year. That's sweet news to the ear of ESS Technology(Nasdaq: ESST).

See, Dad, the company is the top dog in DVD chips, scarfing down more than 40% of the market. The company shipped a record two million DVD decoder chips back in April. Its growing market share dominance is no accident. This isn't a cold commodity niche where the only competitive advantage often lies in how cheap one can outsource semi production. ESS earned the pole position by loading up its product with eye-candy goodness and next-generation features.

The popularity of the DVD format has even professional analysts at a loss to explain the phenomenon. ESS has been a huge beneficiary of the soft sell, thrashing Wall Street profit targets by at least 25% over the last three quarters. At a time when a slowing corporate America has analysts watering down earning estimates for most technology companies, ESS is smiling upstream. Over the past three months alone, projections for how much the company will earn this year have gone from $0.83 a share to $1.23 a stub.

The fact that the stock started out the month at just 13 times those freshly raised income targets is as interesting as it is compelling. You don't have to convince the company about the ridiculously cheap valuation. ESS announced a three-million-share buyback last month.

With the company expecting sequential improvement over the next few quarters, what do you think are the chances that momentum will carry next year's estimates of $1.34 a share in earnings higher, too? Pretty good, right?

Cash-rich and debt-free, there's little not to like about ESS. While the Californian company started out making audio chips for children's toys, it's cleaning up making video chips for everyone else now. Granted, there are risks here. While ESS is on a hot streak, it can never lose sight of the competition. Tech leadership is not forever and the company has to make sure it's always got innovative juices pumping to stay ahead of the pack.

That's why it's important to note that the company isn't just resting on its laurels. New products like MPEG decoders for digital video recorders and integrated DVD systems-on-a-chip are buzz magnets just waiting to roll out. While you never had VHS flaps on your home computer or video game consoles, the DVD format is everywhere. ESS wants to be everywhere, too. I hear it's nice and getting there is half the fun.

Next: Buying Guide for Dads »

Rick Aristotle Munarriz would prefer to view his life in the widescreen letterbox edition. And, yes, Dad, he does own shares of ESS Technology. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.

A Stock for Dad represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts.