2020 | 2021 | ||||||
Price: | 39.00 | EPS | 0 | 0 | |||
Shares Out. (in M): | 7 | P/E | 0 | 0 | |||
Market Cap (in $M): | 273 | P/FCF | 0 | 0 | |||
Net Debt (in $M): | -87 | EBIT | 0 | 0 | |||
TEV (in $M): | 186 | TEV/EBIT | 0 | 0 |
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Silicom is a truly undiscovered company with terrific growth potential trading at a value multiple. After a few years of sideways revenue, the top line is poised to ignite on the back of three growth vectors. If I am correct, 25% revenue growth for the foreseeable future is not out of the question. There is plenty of operating leverage in the model so revenue growth will translate to rapid margin expansion. Silicom entered the doghouse a few years ago after losing a large contract with IBM due to IBM getting cold feel on the innovative new switching approach the companies were taking together. The company has now been virtually forgotten just as the inflection point of new revenue growth is approaching.
Silicom designs network interface cards (NICs), universal customer premise equipment (uCPE), and distributed units (DU) for use in a variety of applications. NICs are cards that incorporate a chipset that go into empty slots in a network appliance. NICs were Silicom’s original product line and are used to provide network connectivity and CPU offload in devices such as firewalls, storage devices, WAN optimization boxes, and many others. Silicom is the NIC leader both in terms of market share as well as product breadth, with no competitors even close to its market position. Silicom has over 300 cards in its product line compared to its closest competitor with only 40 cards. Silicom is also known for its excellent customer service which makes its customer relationships very sticky and allows it to see what customer needs really are. Armed with this knowledge, Silicom’s hit rate on new products is very high so its R&D efforts are very productive and efficient.
After a small acquisition 6 years ago, Silicom developed a line of uCPE boxes used in enterprise branch offices. These boxes are like switchblades, providing a variety of functionality in one device. The most popular current function is software-defined networking or SD-WAN, which is growing at a 30% clip according to IDC. SD-WAN allows branch offices to connect to the Internet in a more efficient way and save money versus the old way of connection which was through expensive MPLS (Multi-Protocol Label Switching) links. This approach threatens service provider’s lucrative MPLS business and they are responding in different ways. Silicom has won SD-WAN deals with both Verizon and AT&T. While AT&T is aggressively trying to win SD-WAN business, Verizon has been more passive. AT&T has become a sizable customer for Silicom while it is still waiting for Verizon to pick up the pace. Silicom has also won designs with some major SD-WAN software vendors such as Velocloud, Versa, and Silver Peak, and is capitalizing on their growth now and into 2021.
Another growth vector for the company is the work they are doing with FPGA cards. FPGAs (field programmable gate arrays) are chips that use parallel processing to calculate faster than CPUs and are used for calculation intensive functions such as artificial intelligence and autonomous vehicles. FPGAs are also used in data centers and Silicom won a $10 million FPGA data center design win last year. Silicom has been working on the FPGA opportunity for the past couple of years and while it has some revenue in 2020 from these products, more meaningful revenue will really start to ramp in 2021.
Finally, on Silicom’s last conference call the company disclosed a design win with a telecom service provider for DUs in its 4G/5G network buildout. Silicom said that if this network rolls out as planned, it could mean tens of millions of dollars for Silicom from this win alone. On a $100 million revenue base (in 2020E) company, that is very meaningful. Traditionally networks were built by big proprietary vendors such as Nokia, Ericsson, and Huawei. A new open standard has been gaining momentum where different building blocks of the networks are built by best-of-breed vendors. This is called O-RAN (Open Radio Access Network). Silicom is gaining its opportunity here because of this open approach. Even Nokia and Ericsson are now participating in this standard and Silicom has an opportunity to become a DU supplier for them.
Silicom is well positioned in the DU market because it not only designs the DU box itself, it also supplies important NICs that go into these boxes. One NIC is based on Intel’s ACC 100 chip that performs forward error correction in the network, a highly compute intensive function. Silicom is also finishing up work on a timing card that provides critical timing functions in the network. DISH Networks has announced that it is working with Intel and its ACC 100 card in its new greenfield 5G buildout. As Silicom is the only company with a working ACC 100 card, that means it is involved in DISH’s network, too. This is an as-of-yet unannounced win but could be huge for Silicom in the years ahead.
Silicom’s valuation does not reflect any of these massive opportunities on the horizon. On an enterprise value to revenue basis, the stock trades at 1.5x 2021E revenue of $130 million and at 13x 2021E cash earnings. This is a valuation more fitting for a moribund no-growth business. The company also has a pristine balance sheet with $87 million in net cash (which equals $12.22 per share). I think the company can grow at a 25% clip through 2023, at which point it would be doing $200 million in revenue and $4.70 per share in earnings. Putting a 20 P/E multiple on that and adding back the $12.22 in cash gets you to a $103 stock price, or 162% appreciation from current levels.
A significant revenue and earnings beat in one of the upcoming quarters with get the stock moving.
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# | AUTHOR DATE SUBJECT |
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13 | |
While there is ample balance sheet support here I see the stock being dead money at best for a long while... | |
10 | |
Another solid Q for SILC with a big topline beat and smaller EPS beat due to lower GM due to mix. The stock is off today on conservative (but in-line) guidance. Big picture SILC is serving the hot edge compute market and there is considerable leverage in the model that new management is looking to exploit. | |
9 | |
Silicom had an excellent quarter with revenue topping guidance and EPS that crushed estimates. Guidance for Q4 was above estimates and is supported by the company's huge backlog. At $44 the stock is trading at 1.4x 2023E revenue and 8.9x 2023E cash-EPS. A big bargain IMHO. | |
7 | |
Silicom beat EPS estimate by 40% coming in at $0.70 versus $0.50 expected. Revenue also beat and guidance for next Q came in ahead of expectations. Backlog is at record levels and the company is not seeing weakness in new or existing orders from its customer base, even in this bad macro. Trading at 10x P/E ex the $7 (and growing) in net cash this one is a bargain here. | |
6 | |
Silicom reported a $25 million SD-WAN design win with existing orders for $15 million in 2022. At 1x sales and 10x earnings Silicom is not valued for the growth company that it is. | |
5 | |
Revenue and guidance in-line for Silicom which is not too shabby seeing how other hardware companies such as F5 and Juniper are not dealing as well with the supply chain crisis. Backlog is at an all-time record and increased inventory bodes well for a stronger 2nd half. Patience is required but the payoff, when it comes, will be big. | |
3 | |
Huge design win for Silicom today. $50 million a year when ramped on a 2021 base of $128 million in revenue. This stock should be up 25% today, not just 8%. A golden buying opportunity... | |
2 | |
Demand for Silicom's products continues to be strong. The company is starting to see some wins for 2nd generation SD-WAN products, where its OEM customers have decided to focus on software and leave the hardware design to Silicom. Silicom is also starting to see some wins for its 5G time-synch cards. These cards carry at least twice the selling price of its FEC acceleration cards, thus greatly expanding its 5g TAM. | |
1 | |
Revenue came in above guidance with 31% growth year-over-year. The company is still comfortable with ~20% revenue growth for 2021 even with component shortages. Silicom's tight relationship with Intel will help it gain priority in ordering scarce parts. The scale of some recent 5G mobile design wins is not recognized in the annual guidance. Silicom could double revenue in a year or two if some of these wins go according to plan. |
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