CEVA Stock: Small Contrarian Chip Stock with Strong Upside

ceva stock
iStock.com/Alexandar Dryanov

CEVA Stock Is a Beaten-Down Chip Play for Speculators

Malaise in the stock market periodically provides opportunities to accumulate stocks on sale. This methodology is called “bottom fishing,” and it could return big gains.

A small-cap technology stock that is under selling pressure but could bounce back is Israel-based CEVA, Inc. (NASDAQ:CEVA).

For bottom fishers, CEVA stock currently has a good risk-to-reward ratio.

Down 33% this year, the stock is trading at just above its recent 52-week low of $27.35—and well below the range high of $51.80 achieved in November 2017.

For aggressive traders, this offers up a good opportunity to benefit from the oversold condition.

The below CEVA stock chart displays the emergence of a bearish death cross in mid-February, when the stock was trading at around $44.00. We saw a gap down after a weak first quarter.

Chart courtesy of StockCharts.com

CEVA, Inc.’s business is based on its digital signal processing (DSP) chip that is a key component of mobile devices, home entertainment systems, and networking solutions. In 2017, the company shipped around 1.1 billion chips, with about 50% of them being for mobile devices.

The current selling in CEVA stock was triggered by a weak first quarter, with shortfalls in revenue and earnings. The poor performance was blamed on low sales to the mobile segment.

The reality is that the company needs to deliver more growth and consistency to convince the stock market that its growth story remains intact.

My Fundamental Bull Case for CEVA Stock

Revenues have risen sequentially in four straight years from $48.9 million in 2013 to $87.5 million in 2017, representing a compound annual growth rate (CAGR) of 15.7%.

Year Revenue ($ Millions) Revenue Growth
2013 $48.9
2014 $50.8 3.9%
2015 $59.5 17.1%
2016 $72.7 22.1%
2017 $87.5 20.5%

CEVA, Inc. has managed to grow its revenues higher after a lackluster 3.9% growth in 2014. Revenues have grown by more than 20% in 2016 and 2017.

But the company is estimated to see its revenue growth rate fall to 5.2% in 2018 (to $91.8 million), prior to it rebounding to 12.9% (to $103.7 million) in 2019. (Source: “CEVA, Inc. (CEVA),” Yahoo! Finance, last accessed May 11, 2018.)

A big plus is that CEVA saw its cost of goods sold increase at below the company’s revenue growth rate in 2016 and 2017.

Year Cost of Goods Growth
2014 8.8%
2015 19.4%
2016 9.0%
2017 11.8%

CEVA, Inc. has been generating positive earnings before interest, tax, depreciation, and amortization (EBITDA) in five straight years—and positive earnings in three of the last five years.

The company’s EBITDA and earnings both grew from 2015 to 2017.

Year EBITDA ($ Millions) EBITDA Growth
2013 $4.9
2014 $3.6 -27.7%
2015 $8.6 140.9%
2016 $9.0 4.7%
2017 $13.0 44.6%

CEVA, Inc.’s balance sheet has cash of about $6.25 per share, or $139.0 million, and no debt.

The company has been generating positive free cash flow, with growth in 2015 and 2017.

Year Free Cash Flow ($ Millions)
2013 $12.8
2014 $7.7
2015 $17.2
2016 $12.1
2017 $20.3

Analyst Take

My view is that the bullish story is still intact with CEVA, Inc., despite temporary setbacks. The growth metrics are decent and not deserving of the stock sell-off.

For bottom fishers, the current risk-to-reward ratio for this investment is intriguing after the recent selling. Looking ahead, CEVA stock could find its way back to the $42.00 level, representing a 40% advance.