A 13-Bagger With Further To Go

Published in Company Comment on 14 December 2011

When you're in with Apple, the future can look very rosy.

Having a connection with Apple (NASDAQ: AAPL.US) seems to give a company the golden touch these days -- if you can get your products or designs into iPhones or iPads or any other of those must-have gizmos and gadgets, as ARM (LSE: ARM) has done, you're pretty much made.

If Apple itself takes a stake, then there must be a chance for a full takeover too, which could well come at a very nice price -- especially if someone like Intel (NASDAQ: INTC.US) also owns some, and there could be a potential bidding war.

That pretty much sums up Imagination Technologies (LSE: IMG), which reported interim results this week. Imagination holds intellectual property rights to some pretty nifty communications and multimedia semiconductor technology, and also partners with such giants as Sony, Google (NASDAQ: GOOG.US), ARM and a good few others.

Steadily rising revenues

Revenues have been growing steadily since Imagination turned over £48m back in 2007, with this year's first half alone bringing in £56m, which is well up on the £44m interim figure from a year ago.

That translated into adjusted pre-tax profit of £15.3m, which is 50% up on the same stage last year, with adjusted earnings per share coming in at 4.9p, up 48%. But there is no dividend yet, so it's not one for income seekers at this stage in its life.

Those figures look good, but the current price of 482p per share suggests a P/E of 49 if the first-half results are simply repeated in the remaining six months of the year, and it's only a slightly lower 47 using current end-of-year forecasts. But it would drop to around 33 if the City's expectations of near 50% earnings growth for 2013 should come good.

Bandwidth boost

With the share price having risen from a low point of just 32p in 2008 to the 480p mark today, many will see them as overpriced. But is there more to come?

Well, the bandwidth boom that is coming from the next generation of fibre-based connections should bring the cost of those gigabytes down and boost the use of mobile computing technology -- even I, with my £4.95 Nokia phone and general dislike of the things, was reflecting on the benefits while trying to find my way round Manchester on Saturday, having forgotten my printed Google maps and train timetable.

£100m in revenues expected this year? ARM is on for five times that, such is the way this business is going.

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The Motley Fool owns shares in Imagination Technologies.

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newtona2 15 Dec 2011 , 8:06pm

IMG are an amazing company that seem to slip below many an investor's radar. I have followed, and owned them, for many years and have profited again and again from the sheer ignorance of the brokers and analysts. Time and again you see mention in the press of sell notes for "chip make Imagination" or Digital Radio company Imagination" from brokers who actually attend briefings the company put on for them. One of these same brokers put out a sell note 3 days before these results saying they were poorly exposed to Android phones, and thus too reliant on Apple, while Android was seeing most of the growth. This very analyst attended a briefing after the AGM in August that pointed out very clearly that IMG are in over 50% of current and planned Android phones, and are in fact the reference design for the new Android platform and as such would be the ONLY graphics chip supplier in the first generation of these new phones. Is it any wonder that informed Fools treat brokers and analysts with such disdain.

Fortunately, unlike many other smaller companies and most larger companies, the IMG management are very good to small shareholders. Their AGMs are immensely informative, management is very approachable and very honest. Most refreshing.

The key things for would be investors to understand about IMG is the future size of the smartphone and tablet markets - 1.2bn smartphones per year by 2015. IMG management have a three year ahead view of the handsets coming out, and know who has won the design win for them. When the CEO says they will be in 50% of these devices, he really does mean it. This is a trebling of device count in the next 5 years, from 200m to 600m, but does not include the 50+ million tablets that will be sold by then (of which IMG currently have around 80% of the market, which will rise now the Amazon Kindle is out), plus the smart TVs, 3d sat navs, DAB radios and plethora of other devices their IP is in.

With multiple licensing wins this year, which pay in the £1m-£2m range compared to the (allegedly) free license offerings from ARM which have resulted in almost zero design wins, and licences ranging from Apple and TI to Samsung and Qualcomm, plus big players in the far eastern markets that may of us have never heard of, such as Renesas, Mediatek and being in such devices as the Apple iPhone, iPhone 3G, 3GS, and 4S, the iPod Touch, iPod nano, iPad, iPad2, many many Android phones from HTC, SonyEricsson, Samsung, Huawei, Lenovo, and tablets from RIM, HP, Amazon, as well as netbooks from pretty much anyone who uses Intel Atom chips, IMG are at the very forefront of all things graphical in the small tech world. Oh, and they are also in TV's, sat nags, and pretty much control the UK and rapidly expanding world DAB radio market, and are set to be the lead player in the new Windows 8 phones.

As you can tell, I'm a big fan.


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