Will Trident Microsystem be a 10x return Stock (again)?

In the past decade, Trident Microsystems (NASDAQ: TRID) was a super-spike 10x return stock. One of the rare survivors in the graphics chips market, their early products were VGA and SVGA chipsets that targeted at the lower-end OEM market. Because of the cut-throat pricing and rapid technological development in the graphics chips market, Trident’s stock has a volatile past, many times trading around or even below cash value, and exhibited roller coaster type ups and downs, as indicated in its stock chart below.

Trident Microsystems, Inc. 10 Year chart

Trident Microsystems, Inc. 10 Year chart

With margin withering for low-end graphics chip, and cost exploding in R&D cost for the high-end PC graphics chip market [which yielded only Nvidia (NASDAQ: NVDA) and ATI, now acquired by AMD (NYSE: AMD) from the old guards as the only survivors], Trident changed its course around early 2000’s to focus on the digital TV market. The bet was timely, as flat-screen TV adoption exploded in the past decade, and Trident’s stock rose from less than $1/share in 2002 to over $30/share in 2006, a whopping 30x+ return in less than four years. Nonetheless, 2006 marked the high point of Trident’s historic stock price, and its stock subsided afterwards.

When the financial tsunami hit in 2008, Trident found its revenue rapidly faded away, and its focus on high-end flat-screen TV was going nowhere during that time. The company started bleeding cash, and situation seemed dire. The stock tanked to the low of $1.24/share in Feb 2009, and its stock chart became a classic pattern of a super-spike 10x return stock.

Since the downturn, Trident had made many changes to try reversing its decline. Diverging away from its single product line towards the mid to high end Digital TV market, Trident had made various acquisitions to strengthen its product offerings, the largest one being the acquisition of the TV and set-top box business from NXP Semiconductors (NASDAQ: NXPI).

While Trident might be down, we believe Trident’s financial situation has stabilized, and is on the right path to recovery. The latest earnings call on Oct 26, 2010, while disappointing in terms of Q4 revenue guidance, causing a 9% drop in the share price (but that the stock had advanced ~50% in less than 1 month before this drop), in our mind, provided the much more significant guidance of being cash-flow positive for next year. If this is indeed the case, it means that Trident will be trading at < 1x revenue, and around 3.5x cash if its stock price does not change.

The biggest doubt on Trident in the past two years were regarding its survival. We believe that doubt has now been cleared. The doubt is now mainly concerning profits. With new products coming out from Trident in the upcoming year, any design win should help on its bottom line, and the stock has the potential to advance significant for any surprise improvement in profits.

For Trident to become a 10x return stock in this decade, it needs to trade at around $14/share sometime in the future, which represents almost 7x return on its current stock price. This does not mean that it is getting there tomorrow. In face, the stock will probably face selling pressure in the immediate future because of the revenue warning. While a 10x return is highly uncertain, we believe it is possible if Trident can ride the digital content proliferation wave into the future now that survival risk is not as much a concern.

This article originally appeared at Benzinga.com.


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