Is the Digital Video Market Dead Already?

Anders Bylund, The Motley Fool
Updated

Looking at a stock chart for Sigma Designs (NAS: SIGM) yesterday, you'd think that digital entertainment was a dead concept. Shares fell as much as 13.1% after Wednesday night's earnings report and bounced back only very slightly from there.

Zoom out to a wider perspective, and Sigma's 12% one-month drop looks downright healthy next to rivals Trident Microsystems (NAS: TRID) and Entropic Communications (NAS: ENTR) , both of which have been cut in half. As a reminder, the S&P 500 has only lost about 13% of its value over this time span, in spite of economic panics and other wild gyrations.

What did Sigma do to deserve yesterday's pain? Well, it's never a good sign when your CEO comes right out of the gate in a second-quarter report to apologize for the company's performance. "We are disappointed to report $46.7 million in revenue for the second quarter," CEO Thinh Tran's mea culpa began. He blames a timing mismatch as obsolete chips are getting phased out of set-top boxes quicker than expected while their box builders are dragging their feet on buying newer products.

But the mistiming runs deeper than just shifting revenue from one quarter to the next. Management guidance was based on the assumption that the second half of the year will remain "in the trough" as telecom end-market clients keep delaying their media-hardware upgrades. That's obviously also bad news for set-top box builders such as Motorola Mobility (NYS: MMI) and the Scientific-Atlanta operation of Cisco Systems (NAS: CSCO) -- if they're not ordering chips, they're not getting orders either.

In the long term, digital entertainment is a very big deal; Netflix (NAS: NFLX) is only just scratching the surface of what's possible in this market, and the media decoder chip of the sort that Sigma and its frenemies make are powering a revolution -- just a slow one.

There may be more bumps in the road ahead before the good times really start to roll. It's a good idea to keep a close watch on this sector so you can pounce on the next buy-in window. Our Foolish watchlist feature can help you do exactly that. Just click here to get started:

At the time thisarticle was published Fool contributorAnders Bylundholds no position in any of the companies discussed here. The Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Cisco Systems and Netflix.Motley Fool newsletter serviceshave recommended buying puts in Netflix. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. You can check outAnders' holdings and a concise bio, follow him onTwitterorGoogle+, or peruseour Foolish disclosure policy.

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