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Creative Technology Ltd’s Shares Are Up More Than 400% Since Late February 2018: What’s Behind the Euphoria?

Creative Technology Ltd (SGX: C76), which was founded in 1981, is famous for its Sound Blaster sound cards. The sound cards were once the de facto standard for personal computer audio.

From 22 February 2018 to last Friday, Creative Technology’s stock price has climbed by an astonishing 430% from S$1.25 to S$6.62. The Straits Times Index (SGX: ^STI), in comparison, was basically flat over the same time frame. What is behind this astronomical rise in Creative Technology’s stock price?

Game-changing technology

One probable cause could be excitement behind the company’s latest technology – the Super X-Fi –which won the “Best of CES 2018 Award” in the world’s largest consumer electronics show held in Las Vegas earlier this year. Super X-Fi provides users with the experience of listening to a high-end multi-speaker system in a theatre, but through only a headphone.

Sim Wong Hoo, the founder and chief executive officer of Creative Technology, summed up his company’s latest product in a recent press release:

“We are on the verge of a universal game-changer in the way people experience audio in their headphones, where the audio experience is so expansive, immersive, and life-like, that it’ll be the new norm of headphone-listening. Once you experience Super X-Fi, you won’t want to go back to the old headphone experience.

It’s like after watching color on TV, you won’t want to go back to black-and-white! This is the ‘Holy Grail’ of headphone audio which the whole industry has been searching for. I believe this is what every headphone should sound like. This paradigm shift will elevate mankind’s appreciation of audio through this gift we call Super X-Fi.”

Creative Technology is looking to offer the technology through its own headphones, as well as through dongles that can be used with existing headphones.

A peek at the numbers

To be sure, Super X-Fi-related products have yet to contribute to Creative Technology’s top-line, and the company’s financial performance in its last few fiscal years has been poor. From FY2015 (fiscal year ended 30 June 2015) to FY2017, the company had suffered losses in two out of the three years, and it also saw its revenue shrink from US$99.5 million to US$69.9 million, according to data from S&P Global Market Intelligence.

For the second quarter of FY2018 (the three months ended 31 December 2017), Creative Technology’s revenue slipped by 6% year-on-year to US$20.9 million and it made a loss of US$4.2 million, although the loss did narrow from US$6.5 million a year ago. For the first half of FY2018, the company earned a net profit of US$18.6 million, up significantly from the loss of US$12.8 million seen in the first half of FY2017. But, this was thanks to a one-off sum of US$31.2 million received from the settlement of patent lawsuits.

As of 31 December 2017, Creative Technology had US$118.4 million in cash and cash equivalents, and no debt. This is a vast improvement from three months prior, when it had US$75.3 million in cash and cash equivalents, with zero borrowings. This is a positive aspect of Creative Technology’s financials, as the company has the money to cushion its business from rough patches.

A Foolish takeaway

The new Super X-Fi technology may or may not help to bring Creative Technology into consistent profitability.

Buying a stock based on news flow alone is not a great way to invest. Stocks are not mere pieces of paper; they represent part-ownership in a business. Whenever we buy a stock, we should conduct thorough research on the fundamentals of the business and determine if it can grow consistently over the long-term.

As for Creative Technology, it could pay for investors to wait a little longer to see how much the “holy grail” of headphone audio, the Super X-Fi, contributes to the company’s top- and bottom-line.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.