SiRF - Valuation

Saturday, May 3, 2008

Over the last few weeks, I have been writing about SiRF. I am amply clear that a merger or acquisition would be the best end-game for the company today. The earnings conference call did not offer any immediate solace to SiRF investors though the company executives promised a turn of fortunes by the end of this year. In this article, I will conclude this series with a valuation of the GPS leader. I have carried this valuation primarily from an acquisition stand-point. To appreciate the perspectives offered in this piece, I recommend catching up on your reading here, here and here.

My most optimistic valuation of SiRF is at $11.70 per share. In estimating the company’s value, I assumed that the company’s management can carry its restructuring exercise well enough to bring its operating expenses back on track and close to 35% of the revenue. Despite my skepticism, I have also assumed liberal market shares in the various segments.

SiRF’s woes primarily are due to its inability to counter the new wave of competition in the burgeoning cellular handset market. The TAM for the cellular handset GPS is expected to double to over $1bn in 2010 and beyond. Excluding Qualcomm’s market share, the rest of the cellular handset GPS TAM is expected to be 40-50% of the TAM for the mobile GPS market.
Secondly, the driver behind the mass adoption of GPS in mobile handsets is the reduction in ASP. Its high-performance receivers notwithstanding, SiRF runs the risk of being marginalized as more and more mobile chipset providers bundle and aggressively price GPS solutions with their products.

Thirdly, even in segments where it has a dominant presence today, SiRF will find tough competition moving forward. Broadcom (Global Locate) replaced SiRF in ONE (TomTom’s best-selling PND.) Even the portable CE and Portable computer segments for which SiRF is collaborating with Intel will also face stiff competition from Qualcomm’s Snapdragon and Snap Star solutions.

In summary, I don’t see the company getting anywhere close to its glory days again. The 52-week high of $30.61 is but a dream. I have been maintaining so far that its current range for SiRF’s share price is too low. Perhaps, not any more! If SiRF continues to incur heavy expenses and fails to retain its mobile market share, I would value it close to $6. So, the market is justified in its caution.

$11.70 would be my price for an acquisition. If the company decides to stay by itself, the realization of this value will solely depend on efficient expense management and the ability of SiRF to efficiently retain good market share levels.

[I picked up the company’s shares close to its bottom. I will monitor its movement and offload it at around $10-$11 without blinking an eye. But that is just me!]

Posted by Vijay Nagarajan at 9:00 PM  

3 comments:

Vijay, I usually enjoy your articles, but this time, I think you're just being hopeful.

Acquisition would've been a good idea last year (BRCM reportedly paid over 250M for GL). But pretty much anyone who wanted a GPS chip manufacturer, and had the cash to shell out for it bought one last year. BRCM bought GL, and MediaTek bought uNav.

So who could buy SiRF? Most of the major semi companies already have their own GPS design groups (TXN, STM, BRCM, QCOM, ATHR). Most PND mfg's also make the low-end GPS chips in-house (GRMN, MediaTek).

So who's left?
-INTC: Doubtful. They don't want to be in anything but x86. Sold XScale to MRVL
-MRVL: They made a *loss* last quarter. Their cash reserves are far below their closest competetitor (BRCM). And they really need to focus on reducing costs (and handling options backdating issues) in their core business.

If SiRF *does* actually get acquired, I don't think it'll be at a big premium to their market cap. The company must be doing well, and there must be multiple suitors for there to be a big premium. When SiRF's only viable option is to get acquired (no-one buys their 'turnaround' strategy), I doubt if it'll get a big premium.

As an example, recall PLAY (Portal Player). Its stock got tanked (a lot worse than SiRF though: it only fell 50%) when it lost the iPod nano contract. And it was bought by NVidia for a 19% premium. NVidia really needed mp3 IP for its "Computer-on-a-chip", and had two-three billion in cash. Also, PLAY was making a nifty profit (as opposed to SiRF).

But I've been wrong before ;)

(Disclosure: I don't have a position in SiRF. I used to, but got lucky and sold last year at $27)

spartacus said...
May 6, 2008 at 12:02 AM  

Spartacus,

Thanks for your note. Before I continue, I just wanted to clarify that Atheros and not MediaTek bought uNav.

INTC has a collaborative effort with SiRF for its MIDs as part of its convergence devices strategy. MRVL - your analysis is true. But as the company itself has stated, GPS is an imperative piece that is missing in its portfolio if it aims to be a major player in mobile wireless.

As for my valuation, like always, I have taken the non-traditional route and based it primarily on its product strategy, roadmap and competitive positioning,and not as much on historical financial data. I report the numbers out of my model based on reasonable assumptions. I don't claim it to be the right price.

-Vijay

Vijay Nagarajan said...
May 6, 2008 at 2:41 PM  

Vijay - How are you doing your valuations in general? DCF? Market multiple? just curious. Andy

Andy said...
June 30, 2008 at 7:22 AM  

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