In Harmony with Harmonic ...

12/31/2004 12:00 am EST


Michael Murphy

Former Editor, New World Investor

A long-standing expert in the technology sector, Michael Murphy, editor of Technology Investing and  Tech/Biotech Trader, looks to "bandwidth" for his Top 2005 pick. Here's his commentary on a stock he calls an "arms merchant in the convergence war."

"Our top pick for 2005 is Harmonic (HLIT NASDAQ). The company is the leading producer of video encoders, as well as several other products to create, store, and transport video signals. In the convergence of voice, video, and data, video is the hardest technology. Harmonic’s lead in the new MPEG-4 and Windows Media9 standards gives them an advantage as an arms merchant in the convergence wars, selling to satellite, cable, and telephone companies.

"MPEG-4 compresses video about twice as much as MPEG-2 with no loss of quality. That means it takes only half the bandwidth to deliver a movie or TV signal (regular or HDTV), which is a godsend for systems that either have bottlenecks or need to deliver the maximum number of channels over their bandwidth. Double the channels and they double the revenues. Harmonic recently won the VOOM satellite digital TV business due to their ability to process MPEG-4 signals. As US cable suppliers move away from standards set-top boxes, we will see rapid market growth for open-standard products like MPEG-4 encoders.

"Congress recently passed a bill to accelerate HDTV programming by making local broadcasters either provide HDTV or face competition from satellite companies sending in HDTV network programs from other cities, without having to carry local channels. That will drive more advanced encoder sales. Harmonic will do about $238 million in sales in 2004, and most of Wall Street is looking for 20% to 21% growth in 2005 to about $286 million. I think they are way low. Buy HLIT for my $12 target in 2005, with more to come in 2006."

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