Upgrading on Growth Potential: We see further upside to IDTI’s performance, following discussions on enterprise flash and wireless charging with industry contacts. We are raising our rating to BUY and setting a $10 12-month target price (19x FY14 EPS) as new products are positioned to drive growth in 2H and consensus estimates appear too conservative given our checks.
Operating margin came in at 6% last quarter, but through gross margin expansion (volume, mix) and cost cuts, the company sees its goal of 20% by F4Q14 (March 2014) as “ambitious but achievable” if revenues approach $130M and gross margin climbs to ~60%. Most are not expecting IDTI to reach this goal and appear to be discounting that target by nearly one-quarter. But if management were to achieve this, it would push earnings well ahead of our and consensus expectations and the corresponding improvement in free cash flow would, we believe, further propel valuations.
- Our discussions with industry contacts suggest that enterprise flash is building momentum and point to IDTI’s advantages from its PCIe expertise and while we see a slow roll out of wireless charging solutions, we see IDTI well positioned regardless of the identity of the winner in the standards battle.
- We have completed a product-oriented breakdown of revenue drivers for IDTI to assess its potential for growth over the next two years and have found room for the company to outperform current market expectations.
- Besides recovery in Communications and some growth from SRIO, we see the major drivers in Computing and Consumer (early wireless charging revenue here). We see Computing revenues of $158M and $172M in FY14 and FY15, respectively, driven by our assessment of the Enterprise flash products; we see Consumer growing from $67M in FY13 to $76M in FY13 and $88M in FY14. But our research also suggests upside from these sources of ~$30-40M in FY15.
Key Growth Drivers: We focus here on the new product drivers for growth for IDTI, but fully expect continuing, though gradual, economic recovery to help its core businesses to move up from recent lows.