A French Play On The Internet

France's answer to Intel, SGS-Thomson Microelectronics (STM), a Big Board-listed stock, is starting to attract attention in America. It went public on Dec. 8, 1994, at 22 a share--and streaked to 55 3/4 by mid-August. The stock has since given up much of that gain, falling to 33 in the pounding that technology issues took recently. But Thomson's fans aren't fazed: "It gives investors who failed to catch the stock early a second shot at buying cheap," says one New York investment manager who has been doing just that. The company was formed in 1987 through the merger of France's Thomson Semiconductors and Italy's SGS Microelletronica.

This pro thinks Thomson is the stock to bet on in semiconductors. He's convinced it will catch fire soon--because of its MPEG I and MPEG II chips, which decompress video data for smooth and sharp replay of digital video and audio data. Although other companies have compression technology, this money manager is one of several who see these chips--an access ramp to the Information Superhighway--as a play on investors' infatuation with the Internet.

"The product is at the crux of technology that can access videos out of the Internet," explains this pro. What's sure to lift future demand for MPEG chips is Microsoft's licensing of Sun Microsystems' new Internet language--Java Script. With a new language in place, major new programming will develop, and consumers soon will be able to download complex audio and video programs from the Internet. They may use multimedia PCs or multimedia terminals. In either case, they'll need MPEG chips.

Thomson has a 50% market share in MPEG I chips and nearly 100% in the more advanced MPEG II. In multimedia PCs, the MPEG has been "very well received, especially for Windows and DOS products," says a company spokesman. About $100 million worth of high-margin MPEGs, or 4 million units, have been sold by Thomson this year. He says demand for MPEGs will hit 60 million units in 1997 and 220 million by 1999. MPEGs sell at $35 apiece. MPEGs are also used in the new generation of video CD players. One big customer is Thomson Multimedia (no relation), which has chosen the MPEGs for its set-top decoder used in Hughes DirectTV. Other big customers: Sony, General Instrument, and Scientific-Atlanta.

A rival maker of MPEGs is C-Cube Microsystems, which trades at 100 a share--with a lofty 97 p-e, vs. Thomson's 11. Analyst Mike Gumport of Lehman Brothers notes that Thomson far outstrips its peers in growth and profitability, yet the stock is undervalued. "Based on comparable multiples, our one-year $60 target for Thomson now seems too low," says Gumport.

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