Silicon Image, Inc. (Nasdaq: SIMG) is an extremely undervalued, leading provider of semiconductors for mobile and consumer electronics and licensor of IP for HD connectivity with enormous growth fueled by mobile device proliferation, strong FCF, declining sharecount and recent insider buying. Given its growth, valuation and leading IP position, SIMG is an obvious target for strategic buyers and is reasonably worth $9.20-$12.80/share, or 67-133% more than its current quote with strong downside protection from a fortress, cash-rich balance sheet consisting of $2.04 of cash/FD share.
Company Overview:
SIMG, headquartered in Sunnyvale, CA and founded in 1995, is the leading provider of connectivity solutions that enable the reliable distribution and presentation of HD content for mobile, consumer electronics (CE) and personal computer (PC) markets. SIMG delivers its technology via semiconductor and intellectual property (IP) products that are compliant with global industry standards and feature market-leading Silicon Image innovations such as InstaPort™ and InstaPrevue™. SIMG’s products are deployed by the world’s leading electronics manufacturers in devices such as smartphones, tablets, digital televisions (DTVs), Blu-ray Disc™ players, audio-video receivers, digital cameras, as well as desktop and notebook PCs. SIMG has driven the creation of the highly successful High-Definition Multimedia Interface (HDMI®), the latest HD standard for mobile devices—Mobile High-Definition Link (MHL®), Digital Visual Interface (DVI™) industry standards and the leading 60GHz wireless video standard—WirelessHD®. Via its wholly-owned subsidiary, Simplay Labs LLC, Silicon Image offers manufacturers comprehensive product interoperability and standards compliance testing.
Keys to the thesis are as follows:
Underfollowed, off-the-radar
Covered only by handful of tiny shops, never written up on VIC
Strong guidance for growth of revenues, operating margins and free cash flow over next 12-18 months
15-20% revenue growth, driven by mobile
Gross margins stable at 54-55%
Opex of 34-39%
Implied operating margins of ~18%, up from LTM level of ~9% - the Street has not picked up on this
Yields roughly $330mm of revenues and $60mm of EBITDA
Very cheap with enormous FCF conversion and fortress balance sheet
FD market cap of $460mm (77.4mm sh + 6.4mm options struck at $5.78)
Cash of $134mm + $37mm cash from option exercise ($2.04/FD share)
$0 debt
LTM capex of only $6.3mm
TEV of $289mm, implies only 0.88x revenue and 4.8x EBITDA
Likely worth 2-3x revenue and/or 10-15x EBITDA to strategic buyer, implies ~$9.20-$12.80/share, or 67-133% more than current price
Calculations give no credit for future cash build or share repurchases
Recent, clustered open-market stock purchases by insiders
12/10/13: Camillo Martino (CEO) purchased $38k at $5.39
12/10/13: William George (director) purchased $11k at $5.50
11/8/13: William Raduchel (director) purchased $51k at $5.13
11/6/13: Peter Hanelt (Chairman) purchased $31k at $5.14
Stock repurchases driving declining sharecount
$36.2mm of stock repurchases over LTM period
Sharecount has fallen from 82.6mm to 77.7mm over LTM as company repurchased 256k shares at $5.40 and 301k shares at $5.27
$57mm remains under two repurchase authorizations
Reduced cash taxes due to $88mm deferred tax asset
Only $6.3mm in cash taxes over LTM period
Dominant intellectual property position
473 issued patents
586 pending patents
Champion of standard connectivity methods with continuing innovation
HDMI – high definition multimedia interface (consumer electronics & PCs)
Version 2.0 released on September 4, 2013, which offers significant increase in bandwidth to support Ultra HD (4K) resolution, enhanced audio, etc.
Over 1,300 adopters and installed base of over 3 billion HDMI-enabled products
MHL – mobile high definition link (mobile to HD display)
Strong growth, from 10.5mm units in 2010 to >150mm units in 2013
Features Ultra HD (4K) resolution, enhanced audio, simultaneous high-speed data, touch screen support
Installed base of over 400 million MHL-enabled products
Applications in gaming, home entertainment, productivity and automotive
WirelessHD – wireless, high-speed, cable-quality connectivity from mobile to HD displayGlobal customer base consisting of virtually every major consumer electronics OEM (ex. AAPL)
60 GHz technology enables full HD video with near-zero latency
Smart antennas eliminate Wi-Fi interference
Low power options for dual-screen interactive applications from mobile devices
Qualcomm’s formation of the AllSeen Alliancededicated to open-source architecture strongly benefits SIMG
Current members include QCOM, CSCO, LG, Panasonic, Sharp, HTC, Haier, Harman, TP-LINK, Sears, Wilocity, etc.
Multiple product cycles provide diversification
HDMI relative stable while MHL and WirelessHD adoption ramping up
Exposure to enormous growth, with mobile representing ~66% of Q3 product revenues
Mobile revenues grew from $10mm in 2010, $66mm in 2011 and $121mm in 2012
Customer concentration: Samsung was 35% of 2012 revenue and distributor Edom Technology was 10% of 2012 revenue; Top 5 customers (including distributors) account for 64% of revenueGrowth with other Android-based OEMs should further increase diversification
Relationship with Samsung is rock solid
Unexpected competition from new technology
Poor capital allocation
Unlikely given strong track record of repurchases
Catalysts
Investor awareness; analyst coverage from better known firms
Strong growth of revenues and free cash flow
Share repurchases and sharecount reduction
Integration of MHL and WirelessHD into new HDMI ports driving adoption of the standard
New customer acquisition (e.g. potentially Nokia, which just released its SailfishOS phone which supports Android apps)
Sale to larger player (QCOM, Samsung, MediaTek, CSCO, etc.)
Disclaimer: The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice. The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates. No representation or warranty is made as to the accuracy of the data or opinions contained herein.
I do not hold a position of employment, directorship, or consultancy with the issuer. I and/or others I advise hold a material investment in the issuer's securities.
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