Netlist, Inc. (NLST)

This stock appears to be a sleeper. Netlist has ROE of about 19%, steadily increasing earnings and low debt. It appears undervalued based on future earnings estimates.

Netlist designs and manufactures high performance memory subsystems that are sold to original equipment manufacturers (OEMs) in the server, high performance computing and communications markets. Its products are targeted at the applications within these markets in which memory plays a key role in enabling overall system performance requirements. Its memory subsystems are incorporated into multiple platforms at IBM, Dell, Gateway and Hewlett-Packard and other OEMs to specifically address the high-performance needs of these customer’s systems.

The company reported a 90% increase in the total revenues for the fiscal year 2006 as compared to 2005. Adding to this the company has a strong pipeline of design wins like the IP-series at IBM and Planer-X ramp at H-P and also has a unique design for Dell’s RAID servers which are expected to bring in incremental revenues and substantial growth in 2H07. Moreover NLST is already at the final stage for qualification into P-series and I-series, and is working on Z-series that could provide upside from IBM’s revenue in 2008 as these higher-end IPZ-series servers have less competition than the X-series and are expected to have more stable performance.

Netlist is diversifying into new markets such as communications and industrials like sampling high-density SO-DIMM for new designs at Apple Inc. for its iMac and at Alienware. The company is also working with leading networking OEMs with its industrial flash products such as Cisco Systems and is adding several new customers. The company’s diversification strategy into this high margin segment is likely to result in meaningful revenue by the end of 2007.

Netlist is also starting a new facility in China which will start production in May, and is expected to build good margin to expand business for Asian customers including Lenovo, and ODMs for Dell /H-P. Apart from this the company’s established relationships with several key customers will help it to expand its footprint into multiple product lines within each customer. Looking at all this factors the company looks to be in better position to reap the benefits of growing market which is expected to be reflected in its stock price.