SiRF - down but not out

Wednesday, February 6, 2008

SiRF plummeted to $7.36 (almost a 55% drop) yesterday prompting a wave of articles in the internet replete with puns about the GPS company. This was also compounded by a spate of analyst downgrades (I think seven in total) reducing the target price to $10 from around $30. Reason: A missed quarter earnings report and an uncertain forecast for the next quarter.

While it seems to have come as a major surprise to many analysts who were very bullish about the company earlier, it does not to me. Here is a link to my article back in July where I discuss the tough position that SiRF finds itself in. I wish to re-analyze that article here. Here is the thesis statement I made there -

"I wish to make a bold statement: SiRF will find itself marginalized and out of business if it does not diversify into other wireless technologies or strive to have a tie-up with a cellular or WLAN provider."

I followed it up with these reasons -
  • interest shown by cellular companies in GPS: This was even before Atheros made a smart move picking up U-Nav (incidentally, I had stated then that U-Nav would be acquired too) and NXP got GloNav. I also mentioned that SiRF with its $2 billion market cap (then) was too big to be acquired. Now the company finds its value almost reduced to a fourth of that valuation.
  • Other companies wanting to grad more silicon: That left SiRF as more of a one-trick pony!
  • 'Keep the Bill of Materials low' dictum: Effectively, with more competition comes lower margins. This was something I saw as a critical issue that faced SiRF. Today, this has shown its ugly face with a reduced gross margin that has got the Street scampering.
I concluded that piece stating "So, in summary, I think that if SiRF is not able to make strides in the mobile world in terms of getting a major customer or by diversifying, it runs the risk of being marginalized. If the future is in cellular mobile communications, and each cellular company has its own GPS solution, then it is only a matter of time before the concerted research and development of mobile GPS devices fructifies and begins to displace traditional GPS devices."

If SiRF is not wary about the growing influence of mobile GPS, then it could lead to a downward spiral. The Street is perhaps justified in its reaction - the reality about the company and the GPS market sank in only now. The threshold to push to stock up is also likely to be quite high. While it is clear that mobile vendors like Qualcomm, TI, NXP and Broadcom will now go for their proprietary GPS chipsets effectively shutting out SiRF from a majority of the mobile market, a good portion of the convergence device market is still open for it to battle with the other smaller players. Even there, the battle will be tough given that companies like Atheros will now strive to bundle their GPS offerings with other peripheral technologies such as bluetooth and WLAN. So it remains to be seen how the company wishes to address this situation now.

The company needs some good design wins in the mobile space now to re-infuse investor confidence. And there is potential. It acquired Centrality Communications for a better positioning in the mobile market. Besides, it has active collaboration efforts with Intel for GPS in laptops, which is not bad considering Intel's path-breaking effort as the core of the Apple Air. If my suspicion is right, we will see more Intel processors in Apple's future convergence devices with smaller form factor than the Air. This bodes well for SiRF.I also think there is a strong possibility that Intel may make a move to buy SiRF.

So, while I am not surprised that the stocks plunged, especially given the reasons that led to the fall, I do think that $7.5 is a little too harsh. It will make a slow recovery this year but will perhaps never see the $40 highs of the past. The company has a strong patent portfolio and is still the GPS leader. Although the lack of diversification has come back to bite it, a strong alignment with a mobile vendor should do its fortunes a lot of good. With its technology leadership, I think it will overcome this crunch. It is down now, but not out yet!

Posted by Vijay Nagarajan at 2:00 PM  


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