Follow-up: Actions Semiconductor Co., Ltd. (ACTS)

In a recent post, I identified ACTS as a potential bargain buy, conditionally.

At the time of my last post, ACTS's ADS shares were trading at $2.10 or 0.828 of net current asset value. The company has a history of positive free cash flow and operating income so it looked at least promising.

Well, as I said I would, I had a chance to read through the FYE 2009 statements today and it turns out ACTS is not quite as attractive as it sounded at first. Here's why:

Actions Semiconductor Co., Ltd. is a Chinese company that makes semiconductors (surprise, surprise) for portable media devices. ACTS had a fair amount of success with a product line that provided for tremendous growth of the company in the early and mid 2000's. But they are struggling now for a few reasons:

1. ACTS's semiconductors apparently only work in dedicated portable media devices. In other words, their product is not compatible with newer smart devices that perform a range of functions like telephone, text, internet, music, etc. This may not have been a problem in 2002, but times have changed and depending on who you ask, the stand-alone mp3 player is on its way out.
2. ACTS is behind the technological curve when it comes to multi-function portable devices. They simply do not have product to compete in that market. They need new semiconductors and it's going to take a pile of R&D time and money to make this problem go away (if they can make it go away). Management has acknowledged that they are nowhere near accomplishing this and new product development will likely take years with no guarantee of success.
3. The company grew too fast and developed too many customer and vendor concentrations. Now that the mp3 player industry has come back to reality from its golden age in the mid 2000's and consumers are starting to demand devices with more functionality, ACTS, its customers, and its vendors are finding themselves at a serious crossroads where adapting to the changing market is crucial.

My conclusions are as follows:

Yes, ACTS is trading below net current asset value, but with too much baggage for me to consider it a low risk investment. The company is having trouble keeping up with technological advances but does not have the option of simply riding into the sunset on a cash cow; their cash cow is quickly becoming obsolete. So their only viable option is to throw research and development at the wall and see what sticks, or liquidate. It doesn't sound like ACTS is going to throw in the towel anytime soon, and I'm not willing to finance their cold and lonely climb back into technological relevance.

It looks like at the very least ACTS will need to operate at a loss for a few more years before seeing the benefits from an increase in R&D expenditures. At that point, we're no longer talking about value; we're talking about speculation.