Thu Apr 17 2014
Live Index (1454 articles)

Is This Potential Apple Takeover Target a ‘Buy’?

Unlike many people, I enjoy driving. Whenever given the choice to fly or drive, I always choose to drive. Seeing the country from the highways and local roads is stimulating and often educational about the state of the economy.

Always being on the lookout for new investment opportunities, I recently noticed a unique billboard on I-95. This sign was the same size as the others, but its message was constantly changing. It appeared to present a new advertisement every 30 seconds or so.

Intrigued, I stopped on the wide shoulder to observe the sign more closely. This wasn’t one of those flip signs that mechanically turns to a new message on the reverse side; it was a digital sign much like a big screen TV.

I had seen these types of displays before in Times Square and Las Vegas, but never on a highway in the middle of nowhere. This made me think that these types of digital billboards will likely be the standard in the future. As the price of digital technology comes down, it seems inevitable that nearly every billboard will eventually be digitized.

This thought led me to today’s company, Pixelworks (NASDAQ: PXLW).

Launched in 1997, Pixelworks is a San Jose, Calif., fabless semiconductor company specializing in video display processing technology. The company holds 125 patents related to the display business. Basically, Pixelworks makes the technology that allows large, high-resolution flat panel displays, digital signage and other high-end display applications to function.

The fiscal fourth quarter showed a slight gain in revenue to $ 15 million from $ 13.6 million a year ago. Profit margin was also higher at 56.7% versus 48.6% in the year-ago quarter. Net income of $ 1.3 million was a significant improvement over a net loss of $ 2.8 million in the fourth quarter of 2012.

The most recent public news for the company is the appointment of former Apple (NASDAQ:AAPL) executive David Tupman to the board of directors. Interestingly, Apple was the source of more than 10% of the company’s revenue in 2013. Oddly, it’s uncertain exactly what Pixelworks provides to Apple, but it is likely related to the new retina display technology.

When news of the Apple relationship was disclosed in early March, PXLW shares nearly doubled from $ 4.80 to $ 9 in one day. However, the stock failed to hold these lofty levels and drifted back to the $ 5 area.

In the past week, PXLW has made a two-step-forward, one-step-back push higher to the $ 6 level. This seems to have been triggered by the Tupman appointment and the belief that it could strengthen the firm’s relationship with Apple.

Yet one primary question remains: What exactly is the relationship with Apple? Investors are not privy to the details. Is it a short-term relationship? Or a long-term one that is going to grow from here? Could Apple be preparing to purchase the company? Anything is possible, but it’s all speculation at this point.

Therefore, we need to rely on the technical picture to make a call on the short-term price direction. Based on the single-day spike higher with lack of follow through, my call is to short the shares.

Shorting anywhere in the channel between $ 6 and $ 5.50 should provide a quick double-digit profit if shares drop to the 200-day simple moving average, currently at $ 4.50.

Recommended Trade Setup:

– Sell PXLW short between $ 6 and $ 5.50
– Set stop-loss at $ 6.57
– Set initial price target at $ 4.50 for a potential 18%-25% gain in 90 days

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