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Creative Technology has Declined by 34% in 2019. Is it Cheap Now?

Creative Technology Ltd (SGX: C76), or Creative for short, has certainly come a long way. The company, which was founded in 1981 by entrepreneur (and current CEO) Sim Wong Hoo, used to be a technology heavyweight during its heyday in the 1990s. That was when it developed and marketed its Sound Blaster Pro sound-card technology. Today, the group is still dabbling in technological products such as MP3 players, speakers, and other electronic devices.

The group was in the news again recently when it announced the development of a new type of headphone called the Super X-Fi, which can make headphone audio sound as good, if not better, than a multi-speaker surround sound system. This new product has been touted as a game-changer for the group and Sim is “very bullish” on its prospects. However, the share price of Creative has since declined by 34% from S$5.44 in mid-January 2019 to S$3.60 on 24 May 2019. So, is Creative worth looking into now?

Surround-sound “noise

While the product is obviously a breakthrough, as there were rave reviews written about it, monetising the technology is an altogether different issue. The Super X-Fi headphone won 10 awards at CES 2019, a consumer electronics show, and triggered huge interest from OEM partners. However, there was no affirmative statement or plan issued by the group or Sim on how many units of the product were being sold since launch, and how Creative plans to license the technology to OEM partners.

So what investors have been left with, essentially, are promises and vague statements that were not accompanied by concrete strategies and plans. Thus, there is a lot of noise but the group still has not shown any improvement in its numbers.

Relying on lawsuits for cash

The group continues to rely on the settlement of lawsuits with other technology companies as its source of profits and cash. A glance at Creative’s latest 9-months FY 2019 (9M 2019) financials shows an amount of US$17.9 million recognised for litigation settlement, while in the prior year (9-months FY 2018), an amount of US$31.2 million was booked for a similar purpose.

The core business itself continues to bleed, with gross profit of US$12.3 million for 9M 2019 and expenses of US$31.4 million. Accumulated losses have continued to erode Creative’s equity base and this was only offset recently by the lawsuit settlements, which are obviously not a source of recurring income.

Creative needs to find its mojo again

In light of the above, the conclusion is that Creative may not have priced in an unexpectedly poor revenue or profit contribution from its new Super X-Fi. The initial euphoria over their awards won and the product launch has now given way to realism, as investors wait to digest the numbers from this new groundbreaking product.

Investors need to ensure that Creative finds its mojo again, and that the group can demonstrate sustained levels of profits and cash inflows from their core business, before they consider purchasing its shares.

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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 Royston Yang does not own shares in Creative Technologies Ltd.