Semiconductor Maker Could Be Back In Chips
VLSI Technology, a San Jose, Calif., maker of application-specific integrated circuits and associated software design tools, has had its problems.
Some analysts aren’t optimistic about its future, either. But the smart money thinks otherwise.
The stock, which closed Thursday at $19.62, is up over $4 from the beginning of March and, using a new strategy, has only begun what could be a significant climb. “VLSI Technology offers a very good bang for the buck at its current price,” says Rick Whittington, a semiconductor analyst at Soundview Financial Group.
“Over the next five years, VLSI’s profits should climb at an average annual rate of 20 percent,” adds Gregory Dorsey, editor of Wall Street Bargains.
VLSI is working to emulate a strategy embraced by competitor LSI Logic, which has pushed LSI’s stock up nearly 11-fold in less than three years. Specifically, VLSI, like LSI Logic, is developing an entire system on one chip. It has begun shipping these chips to some European makers of digital cordless telephones. Now it’s a matter of persuading customers like Apple Computer, Compaq, IBM and Siemens AG to design such chips into their systems.
Why the naysayers?
Mainly, they’re concerned with VLSI’s lowmargin, commodity chip set business, which still accounts for nearly a third of revenues. That business is OK now because the chip industry is booming, but what about the next slump? True, VLSI has been trimming its reliance on this business, skeptics say, but it can move only so far so fast.
“The question is, can VLSI keep scaling back and not have its business completely fall apart?” says Mark Edelstone, a chip analyst at Prudential Securities.
The answer, apparently, is that VLSI can.
LSI Logic, for one, did so. VLSI has already managed to scale back its chip set business from 40 percent seven months ago, and Whittington believes it will decline to as little as 15 percent in 1996, and “to a bare bones business, if any at all,” in 1997.
Long-term, it’s a scenario he likes.