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Cypress Semi's Next Phase


Chip maker has promising future.


It was just about three years ago that I got involved in Cypress Semi (CY) after concluding that the then embryonic SunPower (SPWR) business looked like more than pie in the sky. The rest, as they say, became yet another chapter of CEO T.J. Rodgers' long history in Silicon Valley. Shortly after SPWR went public CY stock began trading as a proxy of SPWR, with investors at times attributing a negative value to CY's semi business.

With SPWR now looking at revenues of almost $2 billion and net income of almost $300 million for calendar year 2009, CY will cut it loose before the end of the year, spinning off its 40 million+ shares to shareholders. That'll equal roughly 1 SPWR share for each 4.5 CY shares owned, tax free. In the words of the Gipper, "not bad, not bad at all".

But that's yesterday's success, and the focus shifts to what CY can do for its stock price now. Given that the market is valuing CY ex-SPWR at about $4/share, despite a run rate of $900 million in revenues and 50+ gross margins, the answer would seem to be "not much". At risk of going to the well one too many times, and recognizing that there may not be another SPWR gestating in CY's brain thrust, the apathy surrounding CY's Programmable System on a Chip (PSoC) and West Bridge programs seems misplaced to me.

In this layman's eyes, PSoC is a rather disruptive technology in so far as it uses proprietary technology to shrink the number of commodity components needed in a system, thus reducing costs, power consumption and need for space. As one marvels at the iPhone touch screen system, the technology behind it consists of a CY PSoC chip. And it will likely be CY that will power the coming generation of touch screen monitors driven by the next version of Microsoft (MSFT) Windows and Apple's (AAPL) Operating Systems. That's just one example of what the current 8,000 PSoC customers can do with these $1.50 chips. Meanwhile, West Bridge is getting geared up to make effective use of the new 3G networks, by allowing commensurate download and upload speeds through mobile handsets.

I'm not telling you that these products should be valued as if they were a cure for all that ails our planet, but even in a rather pathetic macro environment, they're growing double digits percentages. In lifespan terms, they appear more like teenagers than adults. I'd be remiss if I didn't repeat now and again the obsessive compulsive turn CY's management has taken away from its former single-track focus on technology and towards profitability.

Bottom line is this: if all goes bad, CY's semi business looks to be a 12-15% EPS grower for several quarters, and it's already running at a cash EPS rate of more than $1.00. Give it a 1 PEG, and it should be worth $12-15/share today. Also, it looks like CY will come out of the SPWR spin-off debt free. Anything above these kinda numbers would be extra.

You could put me in a coma and I could still come up dozens worse ideas to invest in.

Postions in CY, SPWR
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