O2Micro with Plenty of Upside

O2Micro International, Ltd. (OIIM - Snapshot Report) has a strong position in the notebook computing market and a growing position in the LCD monitor and LCD TV markets. Management has focused investments into these new vertical markets, attempting to broaden its product portfolio.

June quarter topline results met consensus estimates while the bottomline beat the consensus estimate. The LCD TV markets represent an opportunity to grow its revenue base and boost margins to the low sixties. However, the soft macro environment has delayed this. OIIM is pricing at very reasonable valuation. Consequently, we reiterate our Buy rating on OIIM.

The shares are currently trading at a 10.3x multiple of its 2009 earnings estimate (P/E). The long-term potential of many of the new products being developed and deployed should drive future growth. Earlier, design wins are expected to begin contributing revenue in 2008 and have done so. The company is expected to launch new products in the LCD/LCD TV, battery management and VPN/firewall areas through the remainder of the year.

The persistent weakness in the notebook segment may signify a fundamental shift in the product mix of the company. However, new products have begun to reverse the slide in notebook sales. Consequently, we believe the stock will trade at the higher valuation metric levels. We are setting our price target to $8.

Read the full analyst report on OIIM