Entropic Communications, Inc. (ENTR)
As I mentioned, at the same time I bought PSMI, I also purchased shares of Entropic Communications (ENTR). Since I never really explained the Entropic trade at all, I'll give a brief description here.
Briefly, Entropic is a semiconductor company that manufactures chips specifically designed to process, transmit, and receive high-density media information in the connected home. Their primary source of business, at the moment, is building chips that power set-top boxes used by TV providers, including DirecTV, Dish, Verizion, Comcast, and Time Warner. The company established itself with the first implementation of the Multimedia-over-Coax (MoCA) standard; they also manufacture chips for Ethernet-over-Coax (EoC) and processing complex overlapping signal demands in satellite dishes, making chips that go into dishes proved by DirecTV, Dish, and Sky Italia. Though they seem to be well-regarded in the industry, with better products and a strong intellectual property position, they are considerably smaller than their main competition, semiconductor behemoth Broadcom, and have had difficulty exhibiting growth since their IPO in 2007. Even more difficult, in 2013, they have seen a drop in revenues, and loss over the last several quarters.
So why would I place my bet on this one? Well, for starters, they're developing products that are going to be much more marketable in the next five years than in the last. TV and move consumption has shifted dramatically in the last five years, and one of the most important consumer demands in the next five years will be technology that enables reliable, fast, and versatile consumption from anywhere in the home. Entropic has exactly the right portfolio to give internet and TV providers the hardware they need to bring strong reliable media content into the home over almost any medium. On top of that, they're a very financially sound company, with plenty of assets (very little of which is backed up inventory), relatively few liabilities, and almost no long term debt. And, one of my personally favorite signs, $3.5 million in stock is owned by company insiders, providing nice incentive to keep the company going.
According to Entropic, revenues have slacked off lately as companies that use their chips have slowed down the release of new products, due to a variety of internal constraints ranging from budget issues to new inventory management. However, in the most recent earnings call transcript, Entropics management claims that most of those delays are behind them, and that products will begin to ramp in Q4 and into FY2014. Of course, there is no indication that things will be turning around all that quickly The new Comcast X1 and X2 set-top boxes, for example, will probably take a full year to ramp up, starting in early 2014. Entropic is also still integrating the assets, costs and revenues of Trident Microsystems, a significant acquisition made in 2012 to improve Entropic's ability to create true System-on-a-Chip (SoC) solutions. Though the IP and technology involved in that acquisition is highly valuable, those products won't be seeing design wins and product ramps until at least 2015, so that will keep revenues down for a while longer.
Fortunately, other seem to be seeing the same potential in Entropic that I do. When I purchased ENTR in early September, it was at $4.02 a share; I bought 498 shares, putting my position just over $2000. Since that purchase, Entropic has continually grown, now hovering at close to or just over $5 a share, an increase of about 20% in just three months. Of course, this leaves the question of when to get out of the trade. After a few months of growth, some are saying that Entropic is oversold, and ready to drop back down, and I wouldn't want to lose what I've already gained. However, the overselling arguments are largely based on predictions about investors, not the health of the company. To a value investing eye, this is a company with a price/book and price/sales ratio well below industry competitors, a diverse and influential set of customers, and a strong product portfolio that will only get better in the next few years. So for now, I think I'll ignore the dire "oversold" predictions and stick with a company that seems to be headed in the right direction.
The Eponymous Running Tally
Since it's the name of the blog, it seems only fair that I should, at some point, include a running tally in the content. So here is the trajectory of the portfolio thus far:
| 6/05 | 7/05 | 8/09 | 9/06 | 10/04 | 11/08 | 12/06 | |
|---|---|---|---|---|---|---|---|
| Synacor (SYNC) | 1983.15 | 1813.65 | 2622.35 | 2434.40 | 2183.80 | 2380.70 | 2425.35 |
| Volterra (VLTR) | 1830.00 | ||||||
| Peregrine (PSMI) | 3307.80 | 3034.00 | 3278.20 | ||||
| Entropic (ENTR) | 2171.28 | 2250.96 | 2470.08 | ||||
| Capital | 8002.20 | 8002.25 | 4995.60 | 7842.90 | 1932.09 | 1932.09 | 1932.09 |
| Total | 9985.40 | 9815.90 | 9447.95 | 10277.30 | 9594.97 | 9597.75 | 10105.82 |
As you can see, I really haven't done all that well. For every pick I've made that's worked out well (VLTR and ENTR), I've made another that's dropped like a rock (SYNC and PSMI). Of course, as I've said, I have considerable faith that PSMI will recover, and possibly quite soon, but for the time being I am, rather embarrassingly, just breaking even. I may need to reconsider my habit of doubling down on stocks after they drop. Anyway, that concludes the long-winded and long-overdue update of my entirely virtual portfolio.
