Friday, August 24, 2012

CEVA Fine Tunes Their Operation For 4G LTE

According to a recent presentation sponsored by Barclays Capital, CEVA (CEVA) is the world's leading licensor of DSP (digital signal processing) cores and platforms with a 90% market share. DSP essentially helps translate analog signals to digital and vise versa. Two other main engines in the cell phone are the CPU, brought to you by a company like ARM Holdings (ARMH), and the GPU for graphics processing, in which Nvidia (NVDA) excels.

The over-arching theme of my writings and stock selections since January 1st, has been in the wireless broadband sector. Anything to do with smartphones and tablets. My impression is that this a market worth cultivating, and in the next two to three years, may grant me a bigger paycheck. I'm primarily in small caps like CEVA to take advantage of the potential growth in a sector that is the driving force behind much of the technology expansion.

What I want to concentrate on is 4G LTE growth for CEVA. This is where the technology is going. Just look at all the television commercials we are being bombarded with by the likes of AT&T (T), Verizon (VZ) and Sprint (S). CFO Yaniv Arieli sheds some light on what could be a very profitable market, not just for CEVA, but their partners, too, at the Barclays Capital Conference:

"The next growth driver for us is the movement from 3G to LTE. Samsung, Broadcom (BRCM), Intel (INTC), Mindspeed (MSPD), all of these guys are using us not necessarily anymore for just cell phones. We have design wins in base station. We have design wins in smart grid. The volumes could be quite big in these markets, and if you look at the LTE subscribers today from 12 million anticipated to grow to north of 700 million over the next three years."

In addition, CEO Gideon Wertheizer discusses some impressive developments in 4G LTE in the latest conference call: "On 4G LTE, we continue to make progress in terms of customer attraction and design wins in this lucrative market. With the additional agreements we signed during the second quarter, we now have more than 20 LTE design wins with our DSPs.".

As semiconductors consolidate, CEVA is now moving into imaging, vision, audio and voice type of functionality. Battle lines are being drawn. This is because what was once a fragmented market is now solidifying, "...which is being driven by big OEMs vertically integrating and developing their own chips. This is evident in OEMs including Samsung, Apple (AAPL) and Huawei, integrating their own chips into their smartphone designs.".

The CEO goes on to say: "An example of this strategy coming to fruition is the strategic agreement we concluded during the second quarter with a Tier 1 OEM, who claims to use our DSP cores across a range of LTE products, ranging from mainstream LTE smartphone to next generation LTE advanced designs. For confidentiality reasons, we cannot elaborate more on this important deal at this time.".

When pressed further on this issue during the Q&A session by an analyst, CEVA's management didn't pin down an exact number of how many Tier 1 OEMs have licensed their LTE technology, but said it was in the range of two to three. This is great going forward, but LTE isn't expected to ramp up until late 2013, or the beginning of 2014. They need to pay the bills somehow, and that will be done via the already existing 2G and 3G initiatives.

Although in the most recent quarter, the 2G market experienced pricing pressure, CEVA's volume growth in the expanding 3G market during Q2 significantly outpaced that of the overall 3G space, as low and mid-range 3G smartphones gained traction, as paraphrased by Mr. Wertheizer. That's all well and good, but Wall Street didn't like CEVA's progress and the stock continued to trade near its 52 week low after the conference call. I took the opportunity to add to my holdings.

My median price for the equity is $19 (it currently sells for about $17). I originally bought CEVA at $22/share, and dollar cost averaged down at $15 when I liquidated my position in Sequans Communications (SQNS) two weeks ago. Both Sequans and CEVA are in the 4G LTE space, but Sequans has too many red flags for me to stick with it. With a much-needed cash infusion, and the thought of my assets being vanquished, I decided to part ways with the company. However, I will be monitoring it to possibly go back into it in 2013.

Although I like and own CEVA, a basic sticking point with the equity is that it appears to be overvalued if you look at the P/E and PEG Ratios. Sure, it's down almost 50% from its 52 week high, but the numbers don't lie. There's a lot of white noise in day-to-day investing with the barrage of information investors get from the numerous media outlets. I prefer to go year-to-year when doing evaluations, and according to Yahoo Finance, the measurables don't appear to be bargain basement.

Average analyst earnings estimates for 2012 are $.80/share. That's a P/E of 21. Extrapolating out to 2013, the average earnings go up about 13% to $.91/share. Next year's P/E calculates to 19. That's not a blue light special. If we examine revenues, sales for next year are only supposed to grow at 8.4%. Nothing to write home about.

So why would I want to be in a stock like CEVA? I like their prospects going out three to five years. I think I can double my money, if not more. Although reasonably valued, divinely ordained equities like Apple and Google (GOOG) have too big of a market cap to be included in my personal portfolio. Granted they have superior operating systems, but the law of probability, combined with the law of large numbers, may have caught up with these celebrity status stocks. Both companies are not quite long in the tooth, but not quite nimble enough to do anything more than double in the next couple of years.

Doubling your money is a terrific return for any investor, but I believe my best bet is to allocate my resources to their lesser known contemporaries. Stocks that may triple or more because of the success of Apple's iOS and Google's Android operating systems. It's a profitable arrangement for everybody betting on the sector.

With clients like Broadcom and Intel (INTC) licensing CEVA's technology, it is difficult to determine when the stock will get back in motion. However, with the upcoming release of the iPhone 5, all securities in the wireless sector may get goosed. I'd rather be early than late. My view is that investor psychology may play a big role in wireless broadband companies.