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. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
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!