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One of our goals with this service is to alert you to stocks that you should avoid -- and occasionally, ones that you should buy, even though we're not adding them to the model portfolio ourselves.
Falling in the latter category is
, which provides DVD software, video-editing and television-viewing and recording software to PC original equipment manufacturers (OEMs) and consumer electronics companies.
We would add this stock to our portfolio, but our investing rules state that only 20% of the stocks we select can be priced over $10. (Consider it a sort of bonus stock for subscribing early.)
The company, which reported revenue of $57 million in 2003, scored well in the momentum and alpha areas of our proprietary screen. Although most tech stocks have spiraled downward since April, InterVideo has bucked the trend and returned 25.2% during this period.
WinDVD, InterVideo's flagship product, accounted for 81% of total sales in 2003. The percentage of sales to OEMs, which have lower margins than retail, is expected to decline this year because the company has been increasing its retail business through the Internet and retail stores.
The retail push, which began in 2003, had been tracking slower than anticipated but gained traction last quarter and is expected to account for 21% of sales this year, up from 16% in 2003.
Historically, the company has supplied eight of the top 10 PC OEM's, and
accounted for more than 19% of 2003 sales. First-quarter 2004 sales increased 41% to $18.8 million, translating into 17 cents a share on the bottom line.
Increased acceptance of its retail products is key to InterVideo's future growth. The company recently scored a huge win when it beat out
( SNIC), the leader in DVD playback software, for a desktop deal with HP. In addition, management sounds upbeat about the prospects for InstantOn, a home entertainment program. An OEM contract in this space would underscore the company's success outside of the WinDVD market.
There are some warts here that bear mentioning. The company will be losing
, which accounted for 12% of sales last year, as a customer. Also, its stock has been volatile, trading from $9.50 to $28.65 since going public in July 2003. The reasons for this include margins pressured last year by slower acceptance of the company's higher-margin retail business, and investor concern over an increase in deferred revenue, much of which is forecast to show up this quarter.
The stock isn't on many investors' radar screens and scores relatively well on our Alpha factor. When you figure that there's little analyst coverage, a recently initiated stock buyback of up to $10 million, and just 9.4 million shares in the float, we believe InterVideo presents a good buying opportunity. The stock has the potential to trade toward the upper teens later this year, from the current $13.48 a share.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider InterVideo and Sonic Solutions to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
This article was written by TheStreet.com Stocks Under $10 Investment Team, David Peltier and William Gabrielski.