For some time, surround sounds have been synonymous with full-sized speakers in the theatres. That perception finally changed, when Creative Technology (Creative) made waves with the release of Super X-Fi – a dongle that recreates three-dimensional audio when plugged into any audio source. The new technology seeks to transform how one can enjoy realistic audio, even on the move, without having to burn pockets for expensive surround sound systems.
After clinching the “Best of Consumer Electronics Show (CES) 2018” held in Las Vegas, Creative’s new technology put its stock up on a rocket. In a matter of days, shares of Creative surged from barely over a $1.20 to touch a high of $10, prompting queries from the Singapore Exchange. However, as Creative had yet to release any product using this technology, we thought that the exuberance was disconcerting and hence why we abstained from looking at the stock then.
Just a year later and as at the time of writing, Creative’s stock has since corrected almost 50 percent to around $5.57, vindicating our initial scepticism. Nonetheless, with worldwide sales of Super X-Fi already commencing in November last year, what are investors buying into at the current valuation?
A Promising Technology
Just last month, Creative bagged another four awards for its new suite of Super X-Fi products showcased at CES2019 – the world’s largest consumer tech trade show. Clinching the Best of CES awards from top industry media TechRadar, SoundGuys, AVS Forum and Overclock, industry sources corroborated about the huge crowd that Creative drew at its exhibition.
The underlying technology, Super X-Fi, involves a sophisticated computational and mapping of the shape and size of users’ head and ears. Using these parameters, along with other various inputs such as the dynamics of the targeted headphones and desired room acoustic map, Super X-Fi recreates an expansive and unique audio experience for every individual.
Some of the Super X-Fi products showcased this year, such as Super X-Fi TV, are only expected to hit the market in the latter half of 2019. However, we at Shares Investment have personally tested the already released Super X-Fi dongle amplifier and found that the product truly works wonders. As such, we are also of the view that the underlying technology is indeed promising.
Track Record Of Execution
Creative shot to fame in the 1990s when it launched the “Sound Blaster” sound card which became the de facto standard for consumer audio for personal computers. With its first mover advantage, Creative quickly gained a dominant position in the market, selling over 400 million units worldwide.
However, the eventual integration of audio processing into motherboards in the early 2000s quickly made the “Sound Blaster” cards lose relevance. Since then, Creative has expanded its portfolio of product offerings but has found little success. For instance, the ZEN Touch – a personal MP3 player – which saw initial success, lost out against Apple’s iPod.
For the Super X-Fi, which the company said was 20 years in the making, may prove to be a game changer to turnaround Creative. With this industry-changing technology, the Super X-Fi endows Creative with the potential to reshape how consumers appreciate audio in the future if executed well.
At its infancy, Creative seems to be targeting the gaming and entertainment crowd. Already, the company has partnered with iVideoSmart to allow users to have a taste of Super X-Fi for free on a limited basis. iVideoSmart, a video publishing platform, has over 75 million unique monthly streamers in Asia and would allow Creative to rapidly scale up Super X-Fi user base.
Unlike the Sound Blaster days, Creative has made the option for established audio players to buy the Super X-Fi chip available this time around. Allowing consumer equipment makers to have greater control over the integration of the Super X-Fi technology would further facilitate the adoption into the wider industry ecosystem – a move we overwhelmingly concur with.
While the new technology appears really promising, it is almost impossible to price in this potential to Creative’s stock price given that the company has yet to announce any financial figures relating to the Super X-Fi suite of products.
In the latest 1Q19 results ending September 2018, there were no sales recorded for Super X-Fi products. Shipments to the Singapore market only commenced in the beginning of 2Q19 while shipments to the US market would only commence meaningfully in 3Q19. Therefore, in the coming earnings release, investors should look out for the contributions of Super X-Fi to get an understanding of how well the local market is receiving the product. A boost in gross margin would also signal how effective Creative is monetising this technology.
On a valuation perspective, at the share price of $5.57, stock of Creative is trading at a trailing 12-month 25.1 times price-to-earnings (P/E). However, stripping away the litigation settlements Creative received over the past 12 months, Creative would be in a net loss, rendering the positive P/E to be irrelevant for assessment.
Currently, the only investment merit – on a financial standpoint – for Creative is its strong balance sheet. Based on 1Q19 results, the company has US$75.3 million in cash against zero debt. At the current share price, the stock is changing hands at 2.6 times its book value.
Not For The Faint-hearted
As Oracle of Omaha Warren Buffett once warned, investors can get into a whole lot more trouble in investing with a sound premise than a false premise, because they forgot the limitations of original premise and let price action take over.
The reality for Creative stock right now is similar to the above analogy. Only investors with larger risk appetite would have the stomach to buy into the stock without a solid basis.