Friday, July 22, 2011

Data I/O ( Nasdaq - DAIO ) -- Skeptical Audiance Creates Cheap Entry Price

Data I/O (DAIO $5.70) reported unexceptional Q2 results.  Earnings dipped 29% to $.05 a share.  Sales advanced 4% to $6.85 million.  Sales declined sequentially although orders improved to $7.3 million.  Backlog climbed $500,000 from the end of the March quarter to $1.6 million.  A series of high potential software products is slated for introduction in August.  That rollout probably will continue into 2012.  The new software features could leverage sales of Data I/O's semiconductor programming hardware products.  Stand alone sales of the software to the installed base promise to amplify performance.  Data I/O remains tight lipped about the product features and pricing.  That's caused most investors that currently hold the stock to take a cautious view.  New investors haven't gravitated to the story yet, either.  Downside risk is limited, since Data I/O is the leader in its field and the industry promises to remain vibrant over the long haul as computer chips become more complex.  The company's systems load specific applications onto standard computer chips.  For instance, Ford Motor may load a particular set of instructions and data files onto a Texas Instrument chip to control the brakes on a Fusion.

The new software could cover a lot of ground.  Loading data onto chips continues to be a fairly high end operation.  But the real growth will come from ancillary features like process control and tracking to thwart piracy and other forms of intellectual property theft.  That business promises to make a lot of money right off the bat.  It also could boost Data I/O's hardware penetration.  Competitive offerings will be able to perform the data loading but the value added software probably will be available only on Data I/O machines.

We are raising our 2012 earnings estimate by 25% to $.50 a share.  A stronger performance is possible if direct software sales take off, or the software leverages demand for the company's hardware.  Data I/O intimates the new products could expand its potential market by 1,000% over the next five years.  If that's even remotely true these shares could produce exceptional appreciation from current levels.

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