Tessera Technologies, Inc.'s (TSRA) advanced packaging technologies have industry-wide application. June quarter top-line results beat consensus estimates while the bottom-line missed slightly. We continue to rate shares of TSRA a Buy.
The stock is currently trading at a 15.1x multiple of our 2009 earnings estimate (P/E). Considering the company's market strength and the potential of its IP, we expect solid revenue and earnings growth to continue, even without any further blockbuster developments. The firm has won five major lawsuits and now receives royalty on approximately 80% of the DRAM market, which should be a catalyst in 2009.
The management asserts that once DDR2 replaces DDR1, growth rates should be greater than 50%, and they are starting to develop DDR3. Given Tessera's cash generating history and attractive business model, we believe the stock should and will continue to trade above peer group valuation multiples. We acknowledge concerns over increased litigation costs and the potential for large swings in revenue caused by large irregular settlement payments, but these concerns have created this attractive entry point.
We would be more concerned with rising litigation costs if the company were not winning most of the cases. We recommend the purchase of this stock for investors that have a time horizon greater than two quarters. We are reiterating our target price of $35.00, which represents a 22.4x P/E.
Read the full analyst report on TSRA
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