Tessera Posts 76% Earnings Surprise, But It Isn’t Enough

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TSRA Tessera Technologies Inc.

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October 30, 2009

Tessera Technologies (TSRA) is one of my favorite stocks. This company licenses its technology to some of the biggest names in the tech industry—Intel, Hitachi and Toshiba. But the best part is that many investors have no idea that this company even exists. Situations like this are a great opportunity to make money when the company reports blowout earnings and latecomers flock to the stock.

Ahead of Thursday’s earnings, I predicted that this growing tech company would beat analyst expectations by about 14%. Well, the stock blew out even my optimistic outlook and announced that they earned 37 cents per share and destroyed the 21-cent estimate for a 76% surprise.

But this was not enough to get investors in the buying mood.

Tessera decreased its fourth-quarter revenue estimates to $60 million to $62 million, down from $66.1 million this quarter. Basically, TSRA is suffering from its own success. Just like when you’re at the grocery store and you save money by buying in bulk, so goes the pricing strategy for Tessera. They call them “volume-based pricing incentives,” which means that customers are buying Tessera’s major dynamic random access memory (DRAM) chips in bulk, getting the discoun,t and it’s lowering Tessera’s revenue.

I don’t want to make a call on how Tessera should price its products, but I believe this news represents a buying opportunity for TSRA. This is a great company with a strong product line that helps companies make their electronic devices smaller and faster, and that need isn’t going away anytime soon.

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