Tessera Technologies (TSRA) is a relatively small semiconductor company based in San Jose, California. The company liscenses its IP to other Tech companies needing miniturized chips sets to fit the ever-shrinking gadgets. The company was featured on Tuesday night’s Mad Money with Jim Cramer as he discussed why he likes the stock more now, after a sizeable run up, than he did at lower price levels. Indeed the stock has recovered from very low levels after an unfavorable International Trade Commission ruling in November 2008 that dropped the stock by about half. Tessera is up nearly 80% since the beginning of the year, as the ITC recently ruled in its favor over a patent dispute with Motorola (MOT) and Qualcomm (QCOM) among others. The ruling will provide Tessera will millions in licensing revenue, and with only 48 million shares outstanding and fewer legal fees into the future, this will provide a nice boost to EPS. The current earnings estimates call for EPS of $1.09 placing the current P/E at 19, but this should come down as estimates begin to factor in the added licensing revenue.
“…Sometimes a stock can become a better buy and a better value after it’s had a big run. And I’ve got one. I want you to take Tessera Technologies,TSRA. This is another speculative tech stock like those I’ve been recommending for weeks. Since I believe the next leg of the tech rally, which started today, with Apple up $8, will now provide further upside.” CNBC’s Mad Money 5/26/2009
When you add the benefit of a favorable IP dispute to a company that is already profitable and has an immaculate balance sheet, the upside potential can be great. The balance sheet has no long term debt to speak of, a current ratio of 5.6x, and an unbelievable $7.50 per share in cash and equivalents. Considering Tessera stock was trading in the mid-$40s just a year and a half ago there could still be plenty of upside potential.
At Ockham, we were positive on the stock prior to the ruling with our Undervalued valuation and will continue to be at these price levels. Cramer was quick to point out that this is a speculative call because of the size of the company and the rapid appreciation in shares, but according to our valuation methodology this spec play has a lot of value as well. Sales growth has continued to be impressive, even through the downturn in the economy and the long term trends in gadgets seems to favor any chip maker that can continue to make them smaller and faster. With the legal battle won, the company has become more aggressive as they announced completion of the acquisition of Dblur Technologies, an Israeli company that makes Camera lenses.