LSI Stretched on the Bounceback

We expect storage and networking chipmaker LSI Corporation’s (LSI - Analyst Report) leadership in new technologies like Serial Attached SCSI and RAID on Chip to become meaningful revenue drivers in late-2008/early-2009, when share gains in the hard disk drive space begin to accelerate. Until then, headwinds from a deteriorating macroeconomic environment remain a significant risk for the story.

Seagate Technology (STX - Snapshot Report) and IBM (IBM - Analyst Report) accounted for 19 percent and 15 percent, respectively, of  LSI’s revenue in 2007. However, STX reported several items for the March quarter that may hurt revenue growth in the storage semiconductor area for LSI. Again, although IBM’s report recently was robust, the strength noted was primarily in software and services, not in hardware, which may not bode well for LSI.

Despite its current business woes, LSI has significant opportunities in the storage chip, system and the software markets, with sufficient depth and breadth of products to compete effectively. It is also likely that management will eventually be able to extract potential benefits of the Agere synergy.

Business trends have clearly bottomed for LSI and are currently in the process of bouncing back. However, valuation looks highly stretched at the moment. Consequently, we maintain our Hold rating and target price of $6 on the stock.

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