GigOptix Inc. (NYSE AMEX:GIG) operates as a fabless supplier of semiconductor components that enables end-to-end information streaming over optical and wireless networks.  Via premium tweet on 7/31/2015, we initiated a long position when the stock was trading at $2.20.  Our reasons for optimism include:

  • Recently reported strong Q2 2015 results:
    • Q2 2015 sales of $9.84 million vs $8.04 million in the prior year and slightly beat analyst estimates of $9.70 million.
    • Q2 2015 non-GAAP EPS of $0.06 vs $0.01 in the prior year and doubled analyst estimates of $0.03
    • Q3 2015 revenue guidance of $10.3 million is above analyst estimates of $10.1 million and would mark a record quarter for the company.
  • Management offered bullish commentary in the earnings release and Q2 conference call.

Bullish Earnings Commentary

From the earnings release:

“The all-around record quarterly financial results we achieved in Q2 represent a positive and significant inflection point in the 8 year history of GigOptix, going back to our inception in July 2007. We delivered our first quarter of GAAP profitability, free of non-recurring items, and the highest ever non-GAAP profitability and Adjusted EBITDA. This record performance clearly shows the success we continue to achieve with our global growth and scalable strategy,” said Dr. Avi Katz, Chairman and Chief Executive Officer of GigOptix, Inc. “Increasing customer demand across all our product lines for our ever-growing and innovative product portfolio is driving our continued revenue growth.”

From the conference call:

“I’d like to make two closing comments. First, I’m obviously delighted with our strong quarter, but more so, based on publicly available financial data, our analysis reveals that our current financial performance positions GigOptix as the top profitable performing company in the under $100 million revenue small capital public semiconductor category.

Based on this data point and our continuous enhanced financials, we obviously believe that the company’s current stock price and market cap values are grossly undervalued. However, we are confident that now, with the excellent second quarter and the entire first half of 2015 profitability and EPS reported results and the solid outlook and guidance for the balance of 2015 and beyond, our stock clearly presents an attractive and promising upside opportunity to all investors.”

  • Strong technical breakout in the stock chart

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On July 28, 2015 Roth Capital reiterated its “Buy” rating and increased its price target to $4.00 from $3.00.

Our Valuation Analysis: Target Between $3.32 and $3.66

Our valuation analysis has GIG’s value not quite at Roth’s price target, but nonetheless elevated at good premiums over the stock’s current price:

  • At a P/E multiple of 25 on trailing non-GAAP EPS of $0.13 shares would be valued at $3.32.
  • At a P/E multiple of 15 on annualized EPS of $0.06 from Q2 2015 shares would be valued at $3.66.

Normally, we adjust our P/E valuation analysis to reflect that a company is paying a normal tax rate if it is apparent that it will begin paying taxes in the near future. As of year-end 2014, GIG had $44.6 million of federal net operating loss carryforwards, as well as $21.0 million of state net operating loss carryforwards that will be used to offset future income for tax purposes. Thus, we believe it is appropriate to not adjust our EPS estimate to assume full taxation.