Having few competitors is a mixed blessing in technology. In the case of static random access memory (SRAM), GSI Technology (Nasdaq:GSIT) is one of the few companies still involved in the industry, but investors ought to be cautious in committing to a market that companies like Samsung and Sony (NYSE:SNE) chose to exit. While there is still growth potential here, particularly if carrier demand rebounds, there may not be enough growth to really get the Street excited about this name again.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

High Performance, but a Small Market
SRAM offers several technical and performance advantages over DRAM when it comes to applications like routers, switches and base stations, and these chips have found their way into many high-performance applications in networking, telecom, military and medical markets. Unfortunately, as alternatives have improved, the addressable market has shrunk and now arguably stands below $1 billion.

That's not a major threat to the SRAM market leader, Cypress Semiconductor (NYSE:CY), as Cypress addresses many other markets as well. For GSI, though, it's definitely more of a challenge.

GSI has chosen to focus on higher-end products and that has allowed the company to see significantly higher ASPs over the years. That, in turn, has allowed the company to grow from a bit player in the early 2000s to a company with something close to 10% overall market share and major customers, like Cisco (Nasdaq:CSCO).

Can Networking Grow Again?
GSI has done a good job of winning slots in the networking industry, but Wall Street is not exactly comfortable with the long-term growth rates that Cisco or Juniper (Nasdaq:JNPR) can expect from routing and switching. At the same time, companies like Cisco and Alcatel-Lucent (NYSE:ALU) have been struggling more recently to overcome sluggish carrier demand, despite ongoing bandwidth demand and pressures on wireless networks.

Eventually some of this growth will re-materialize; there are simply too many carriers that have to upgrade and build out 4G networks for equipment demand to stay weak indefinitely. Assuming that companies like Alcatel and Cisco can drive better orders from carriers, that should filter through to GSI and perhaps offer some upside to estimates.

That said, solid long-term growth likely rests on the company's ability to broaden its capabilities and addressable markets. If current analyst estimates prove accurate, GSI will exit fiscal 2013 with two straight years of annual revenue declines and that simply won't cut it in a tech market where many institutional investors demand double-digit growth before even considering a stock. Likewise, the company's ability to translate revenue into free cash flow has proven to be quite erratic and that ups the risk for investors. (For related reading, see Free Cash Flow: Free, But Not Always Easy.)

The Bottom Line
GSI remains a company narrowly focused on a market that seems to be shrinking. The company's focus on high-end products is logical, but institutional tech investors need to be able to dream big before making major commitments and I'm not sure the operating plan here allows for that. That said, there are some pretty smart institutions in this stock and that cannot be ignored.

If GSI can find a path to sustainable mid-to-high single-digit full-cycle revenue growth and a free cash flow margin in the mid-to-high teens, these shares are quite likely undervalued today. What's more, while many analysts seem willing to predict a rebound in carrier spending, little of that optimism seems to have filtered through to this stock and this could be an over-looked play on that recovery.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  6. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  7. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  8. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  9. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  10. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!