RealMoney Silver - CY Has a Game-Changer

CY Has a Game-Changer
By Bob Faulkner
RealMoney Contributor
12/18/2007 2:55 PM EST

When the economy slows and recession fears rise, investors scramble to protect their assets. They have historically avoided high-growth industries with high-P/E stocks, instead gravitating toward consumer requirements such as health care, staples and utilities.

But should you abandon sectors like technology? What if it that's in your charter and you have to invest in tech? What do you do then?

I think one of the best approaches is to find companies with new products. I'm not talking about another notebook with a bigger screen, or version 9.0 of a software package. I am talking about a game-changer. A company whose products have created a secular change that will continue to gain momentum because the product offers its customers some unique advantages.

Cypress Semiconductor (CY) is one such company.

John Hughes and Scott Maragioglio, two RealMoney contributors, looked at the stock a week ago. They identified it as an excellent value play given its ownership position (53%) in SunPower (SPWR) . Working through the math, Hughes and Maragioglio indicate that the market was valuing the base Cypress business at -$200 million.

What the market doesn't recognize yet is the huge new growth opportunity taking place at Cypress that will not suffer the economic pressures felt by other companies. That opportunity is being driven by Cypress's programmable-system-on-chip (PSoC) business.

PSoCs include analog and digital functionality along with a communications interface, all on a single piece of silicon. They are completely programmable and can be used to control an infinite number of devices. These devices are being managed today by a number of individual components on a circuit board with a lot of difficult and highly customized programming. PSoCs offer designers cost and reliability advantages over today's solutions, and in some cases let a designer offer functions not currently available in the market.

So much for the technical mumbo jumbo -- what does that really mean? Here's just a handful of the current applications.

Buttons, buttons and more buttons! Virtually every mechanical button or switch you can think of is a candidate to be replaced by PSoC. They reduce cost, increase reliability and are immune to the elements like water, temperature and humidity. Whether it's washing machines, MP3 players or the dashboard of your car, PSoC is starting to make waves.

Motor controllers are everywhere as well, and this is another target of the PSoC wave. The brushless controllers that Cypress enables not only reduce cost but boost energy efficiency as well. Any idea how many small motors need to be controlled in the average automobile?

Light-emitting diodes (LEDs) are quickly becoming a preferred illumination technology given their cost, flexibility and energy efficiency. However, individual LEDs lack color uniformity and consistency in brightness. PSoC controllers can adjust for these variables, reducing the OEMs' cost in using an LED solution.

PSoC applications are only limited by imagination. Adidas makes a running shoe that adjusts the cushioning of the shoe to the runners' style and the running surface via an embedded PSoC. Therma Blade makes a replacement ice hockey skate blade that heats up to reduce friction between the blade and the ice surface, increasing its performance. It is controlled by PSoC.

These are just a few ideas; the possibilities will continue to grow, limited only by the creativity of engineers.

Today, Cypress's PSoC operations are modest, currently at a $200 million annual run-rate with growth above 30% year-year. However, today's revenue is from designs that were created a year or more ago. The company has about 4,000 PSoC customers and is ramping toward its goal of 20,000.

The current situation with Cypress and PSoC is very much akin to the early days of the field programmable gate array (FPGA) industry pioneered by Xilinx (XLNX) and Altera (ALTR) back in the early 1990s. As these companies created an infrastructure and educated the engineering community about their products, the benefits and advantages vs. traditional methods were painfully obvious. The success Xilinx and Altera achieved sent more than a few application-specific integrated circuit (ASIC) companies to the scrap heap of history.

That's exactly what Cypress is doing today with PSoC. From an investment perspective, the secular wave the company is riding should more than overcome any short-term weakness in the world economies. Mr. Market may be valuing the base Cypress business at next to nothing, but Mr. Market has been known to be wrong. This is a name you want to own and hold onto for some time to come, because 2008 is just the beginning.