Forget Intel, This Tiny Chip Stock Is Ready To Soar

| July 15, 2009

Did you hear the news?  Intel (INTC) had a blowout quarter.  Last night, they reported sales and earnings that surprisingly soared past everyone’s expectations.  With the world mired in deep recession, nobody was looking for a strong showing from the chip maker.

But, that’s not all.

The company also issued a much stronger than expected forecast for next quarter.  In a surprise announcement, the company said revenue and gross margins will be significantly higher than analysts’ estimates.

This startling news is causing quite a stir.

The markets are surging.  As I write this, the Dow’s up more than 200 points for a better than 2.5% gain.  The semiconductor industry’s up almost 4%.  And, Intel is bounding higher by more than 7%!

So, what’s behind this buying frenzy?

Many believe Intel’s numbers and guidance signal the recession has bottomed (at least for the tech sector).  The company’s strong sales are evidence consumer demand for PCs is starting to pick up.  And, their decision to provide quarterly guidance (which they had stopped doing in January) is a sign order rates are becoming more predictable.

Not to mention, Intel’s CEO said in April, sales had “bottomed out” in the first quarter and the chip industry was returning to normal seasonal patterns.  Investors were pretty skeptical when this statement was made.  But, in light of the company’s strong earnings, it now bodes extremely well for the industry.

Chip makers typically do better in the second half of the year. With the worst apparently behind the leader of the pack, the entire industry is setting up for a strong rally over the next six months.

The big question now is how can you profit from this trend?

One way of course is to buy shares of Intel.  They’re the largest chip maker in the world.  The company is a blue chip and member of the Dow Jones Industrials.  And, with 75% of all computers in the world running on Intel microprocessors, they’re sure to show steady performance as the industry recovers.

But, that’s a bit boring – what about something a little sexier?

A few months ago, I recommended an amazing chip technology company called Ceva (CEVA) to subscribers of my advisory service, Penny Stock Breakouts.  This tiny company is a leading provider of digital signal processor (DSP) technology.

Over a billion chips worldwide run on this company’s cutting edge technology.  Everything from wireless handsets to portable audio devices to digital cameras to digital TVs uses this technology.

The company’s customer list reads like a who’s who of the technology sector.  Companies like Broadcom, Nintendo, Nokia, Samsung, and Sony Ericsson, just to name a few.

But, here’s the best part…

The company’s business model is absolutely ingenious.

Rather than manufacture the chips themselves, they license their DSP technology to chip makers around the globe.  They make money by collecting a lucrative royalty on every chip sold.  And, they keep their costs low by not having to spend billions on factories, equipment, and workers.

As you can imagine, their profit margins are sky high.

Last year, CEVA made 88 cents in profit from every dollar of sales. That’s about double the average margin in the industry.  Needless to say, they’re a profit making machine.

And, the stock’s performance is blowing Intel away.

Over the last six months, this stock is up an amazing 52% (during the worst of the recession).  Intel, on the other hand, is up a more sedate 23%.  Remember, it takes a lot more buying pressure to move Intel’s 5.6 billion shares higher than it takes to move the smaller company’s 19 million.

The good news is this is just the beginning of a longer-term uptrend.

CEVA is expected to grow earnings 20% a year over the next five years.  But, I think it could well turn out to be higher.  This estimate was made before the recession bottomed.  As the recovery takes hold, the company should grow faster.

And, the shares offer tremendous upside potential.

Despite the company’s strong growth outlook, the stock trades at a much lower P/E ratio than its larger, slowly growing competitors.  I think the company’s higher growth rate will translate into a higher P/E down the road.

If I’m right, this stock could easily double, or even triple, in the next twelve months.

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Category: Penny Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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