Wunderlich Securities‘s Sandy Harrison this morning reiterates a Buy rating on shares of Applied Micro Circuits (AMCC) and an $8 price target, writing that investors fail to appreciate the company’s ability to ride the wave of “cloud” computing through new server chips.
Applied is one of the first companies to design and market a 64-bit server chip based on technology from U.K. chip giant ARM Holdings (ARMH). While licensees of ARM dominate mobile computing, Intel (INTC) has held sway in high-volume shipments of server microprocessors, a fiefdom it is expected to defend with its forthcoming “Romley” microprocessor. But some server. vendors, including Hewlett-Packard (HPQ), have said they will ship servers using chips from ARM and its partners.
Writes Harrison,
We believe Applied Micro Circuits’ opportunity to be radically transformed with its ARM-based Server-on-a-Chip platform, dubbed X-Gene, has been overlooked by most investors and we believe the shares remain undervalued.
Applied is not yet shipping the chips, and won’t for some quarters yet, but Applied’s shares, at 1.1 times enterprise value as a multiple of sales, are an inexpensive call option on a new $4 billion market opportunity in server chips, he thinks.
Applied could be a take-out target for any company trying to bulk up on “cloud” computing expertise, he thinks:
Given the recent acquisitions of multiple cloud hardware, software and services providers, we believe companies targeting the cloud with disruptive technology will continue to be targeted by larger players and we believe the company could eventually fall into that category.
Applied shares today are up 19 cents, or 3%, at $6.63.
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