Watch Out for This Short Squeeze
Zack is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Entropic Communications (NASDAQ: ENTR) has been a target of short sellers during this past year, falling from the 2011 high of $13.96. In June of 2012, 11.1 million shares are still short, representing 13.36 percent of Entropic's outstanding shares. A short squeeze has already started after Entrop rose 30 percent yesterday. But will the short squeeze continue, and will Entropic Communications continue to see a struggling share price, or is the worst behind them?
The Market Leader in a Growing Industry
According to IMS Research, the market for MoCa products, or multimedia over coax alliance, is expected to grow 40 percent annually over the next 4 years. (MoCa products are essential to many of our home entertainment systems. From streaming videos from Verizon's internet, to watching television through Direct TV, MoCa products are very important.) If that figure turns out to be true, than the best investment in this area would be the market leader, Entropic Communications. Entropic Communications was the first to announce the availability of MoCa 1.1 in 2007, and it was the first to release MoCa 2.0 in May of 2011. The semiconductor giant Broadcom (Nasdaq: BRCM) has followed with their release of Moca 1.1 and Moca 2.0. MoCa 2.0 was released about 6 months after Entropic released their MoCa 2.0 which gives a slight advantage to Entropic. Entropic Communications has found their market niche with the MoCa products, while Broadcom can't afford to spend so much research and development on a specific product. This leads me to believe that the best way to play this growing industry is Entropic Communications.
The Great News for Shareholders
Contrary to the 30 percent drop on August 5, 2011 when Entropic Communications released dissapointing earnings guidance, this time the company is up 30 percent after raising its second quarter outlook. It seems like the headwinds troubling Entropic in August of last year are now behind them. Back in August of 2011, some major problems were centered around two of Entropic Communication's biggest customers; Verizon Communications (NYSE: VZ) and Direct TV (NASDAQ: DTV). In August of 2011 workers of Verizon went on strike. Anticipating that a new contract would not be made in time, Verizon did not order as much inventory from Entropic as usual. As a result, Entropic suffered. The strike did not actually last as long as it was anticipated, but it still caused a disruption in Entropic's sales. Direct TV was also subject to slower sales as the National Football League was in a lockout. This hurt their Sunday NFL Ticket packages, which was a cause of concern for Entropic. With these disruptions behind Entropic, there is a great deal of good news to look forward to.
According to Entropic's first quarter earnings report of 2012, customers are now migrating over to MoCa 2.0 from Moca 1.1. This is great news as Entropic is at the forefront in selling MoCa 2.0. In April of 2012, Entropic completed the 65 million dollar acquisition of Trident Micro Systems, which is estimated to add $25-30 million in revenue each quarter. Trident provides set-top boxes (STB) which will open another market in the home entertainment industry for Entropic. Along with Trident comes communication networks in Asia Pacific, where Entropic Communications feels it can achieve a great amount of growth.
This 460 million dollar company sits at the heart of a growing industry, in which it continues to be an innovative force. Entropic is only trading at 15 times forward earnings, and it is only valued at 1.17 times its book value. With a successful integration of Trident Micro Systems, increased penetration into the Asian Pacific markets, and a continued demand for MoCa 2.0, Entropic Communications should be a successful investment for years to come.
If you have any comments, please add them, and happy investing to all!
zman4money owns shares of Entropic Communications. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.