Senior management is in disarray, and revenue is expected to decline.
Remember the Pink Panther movie in which Inspector Clouseau disguised himself as a dentist in order to get close to the thoroughly deranged Chief Inspector Dreyfus? In an ill-fated attempt to remove a tooth, Clouseau managed to give both patient and doctor enough laughing gas to last a lifetime. Eventually, Clouseau made his escape using a bladder inflated with laughing gas.
Off he flies, giggling uncontrollably--just as many tech investors have been laughing as the Nasdaq Composite reached 16-month highs, up 32.6% year to date as of Aug. 26. There are, however, some stocks that have failed in their mission to produce positive returns for shareholders. Let's look at some examples.
The worst performer this year has been Loral Space & Communications, which went bankrupt, producing a negative return of 95% for its shareholders. Genesis Microchip also hasn't had a great year. The stock is down 18% since the beginning of the year, underperforming the Nasdaq Composite by roughly 50%. As an investor, I'm always looking to see if situations like this might be an opportunity.
Genesis designs integrated-circuit controllers for various digital displays such as LCD monitors and LCD and digital TVs. The company has had a volatile year. In early March, Genesis raised its revenue forecast by 4% to 5% for the March quarter, citing strength in unit volume for flat-panel monitors. Toward the end of March came a merger agreement with competitor Pixelworks, which would have put the combined company in a stronger position in the market.
That was the end of the good news. In May, Genesis lowered its revenue forecast a tad, citing the growth rate of the flat-panel market and the rate of price declines. In early June, Genesis again lowered its revenue outlook. Then the flow of bad news turned into a flood. On July 15, a federal court found that Genesis must pay a penalty and royalty payments (both undisclosed) to Silicon Image, according to an agreement the two companies signed a year earlier, shortly after James Donegan became CEO of Genesis. Two weeks later, he resigned. And a scant 10 days after that, the company warned of lower-than-expected revenue for the second quarter.
To make matters worse, the proposed merger with Pixelworks collapsed on Aug. 5, primarily because of Genesis' poor operating performance. Its integrated circuits' price decline accelerated and is now a steep 20% per quarter, making it difficult to grow revenue even if unit volume were growing nicely. Genesis isn't alone in facing a new world of rapidly compressing prices that leaves many tech companies with no pricing power.
Is this an investment opportunity? Probably not yet, in my opinion. Revenue is expected to decline sequentially, and senior management is in disarray. Most important, though, Genesis must get declines in average selling price under control so that unit volume growth once again will mean revenue growth. For now, I will escape as Inspector Clouseau did, leaving poor Dreyfus to recover from the wrong tooth being pulled.
William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at email@example.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.
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