Tessera Technologies (
NasdaqGS: TSRA) is a semiconductor company that develops technology for the electronics industry. The company's chip packaging technology allows its clients to produce semiconductor chips used in electronics products, including digital audio players, digital cameras, and personal computers among other things.
The stock is in the news today and will likely be a huge winner based on a big legal victory over several rivals including Motorola and Qualcomm. The International Trade Commission ruled that Motorola, Qualcomm, Freescale, and Spansion could not sell from inventory products that infringe on patents.
“This is a powerful victory for Tessera and the rights of patent holders everywhere,” said Henry R. Nothhaft, president and CEO of Tessera. “The ITC’s decision establishes that the patents in this case are valid and enforceable, and sends a positive message to other innovators that depend on their patent rights to protect their inventions against would-be infringers.”
Investors agreed that this was a powerful victory as the stock soared over 19% to $19.80 in after hours trading. This was on top of a 6.4% move higher in regular trading hours. Some investors obviously anticipated this ruling and are happy to have bought in ahead of time. Does this stock have more upside potential given the huge run it has had? The answer appears to be "yes".
Let's look at the valuation first. Assuming the stock is at $20 per share, it is trading at 14.8x this year's earnings estimate of $1.35 per share. That is well below its long-term growth rate of 30%. Anytime you can pick up a growth stock trading at a PEG ratio of 0.5 or less, it's a good deal. Additionally, it is trading at less than 1.75x book value as well. For a high-growth technology stock, this is attractive.
I like the company's business model which is reliant on royalty revenues that tend to have high margins. In the first quarter, its royalty and license revenues showed year-over-year growth, which was quite a feat given the terrible economic environment. TSRA is in great shape to withstand tough times due to its strong balance sheet which is debt-free and has over $7 per share of cash on it.
In terms of products, they make a silent air cooling product, which is an alternative to fan-based cooling systems. During the first quarter, Tessera acquired several key patents based on this technology. Tessera's development team was able to scientifically demonstrate a 200% improvement in cooling efficiency when compared with fan-based technology.
I think this could be a $25 stock within a year given its valuation and its legal picture becoming a little clearer now. The bulls certainly have the edge with this stock now and I foresee that trend continuing.
