Description

Overview

I wrote up Silicon Motion (SIMO) a year ago and I am re-submitting it as it remains my best idea in technology. I would encourage everyone to read that write-up as the business description is still accurate. Amazingly, despite stellar fundamental performance, the stock is only up 19% from my writeup of a year ago, while at the same time the company grew over 70% in 2021 with forecasts for continued growth in 2022 and beyond. So, over the past year, despite a huge inflection in fundamentals, the SIMO has actually gotten cheaper. The stock has gotten caught up in the recent sell-off in tech stocks in general and semiconductor stocks in particular, giving investors another great entry point to a great growth, capital return and value story.

A year ago SIMO had forecasted revenue of $650M to $750M in 2021 and analyst estimates of around $900M in revenue for 2023. I estimated $3.93 in EPS for 2021 and $5.08 for 2022, and said I suspected they would exceed guidance as they typically guided conservatively. They reported 2021 actuals and guided for 2022 this week. Actual revenue for 2021 was $922.1M and they expect around $1.2B for this year, easily exceeding their 2023 goal of $1B in revenue a year early. 2021 EPS was $6.10 and 2022 is expected to approach $8.00. I think $10.00 per share in earnings for 2023 is achievable- which could make SIMO a $200 stock if it started trading nearer the U.S. semiconductor industry. Its closest competitor MRVL trades at 30x. I don’t know what’s not to like about a company growing double digits at a single digit P/E and with plenty of cash to return to shareholders.

Recent Results and 2022 Outlook

As described above, 2021 was a banner year for Silicon Motion. The company grew revenue by 71% Y/Y and grew non-GAAP EPS by 92% to $6.21. Revenue could have been even higher but the company was capacity constrained the entire year as semiconductor foundry capacity is limited on an industry-wide basis. SSD controller sales increased 75% to 80% in 2021 as SSDs continued to take share from traditional HDDs, and Silicon Motion gained share. While the PC market will undoubtedly slow down from the coronavirus bump, SSDs should continue to take share and the gaming cycle remains strong. eMMC + UFS controller sales grew by over 100% as new customer programs ramped up. The company didn’t even fire on all cylinders: SSD solutions declined 5% to 10% for the year.

Other than the turbulence in technology stocks, I think SIMO sold off recently because investors were disappointed in the Q1 guide: around $230M in sales vs. the St. at $245M. However, a Q1 seasonal decline is not unusual and their guide still implies 25%+ Q1 growth. More importantly, the company guided for full year 2022 growth of 20 to 30%, showing that 2021’s performance was not a fluke but rather a new baseline for the business. The company has a history of guiding conservatively and I believe they will come in at or above the high end of their 2022 guide. SIMO also returns cash to shareholders- they raised the dividend to $2.00 annually per ADS (up 43%) and bought back $50M of stock in December 2021 out of a total authorization of $200M.

Opportunity for Activism?

While there is nothing wrong with Silicon Motion the business, there is clearly something wrong with SIMO the stock. Its valuation has simply not kept up with its semiconductor peers despite superior business performance. I believe it doesn’t get full credit for its stellar execution for 2 main reasons: (1) although Silicon Motion designs and sells complex ASICs (mostly SSD controllers), investors wrongly perceive it as a “memory” stock and give a multiple more befitting Micron or Seagate and (2) its headquarters are technically in Hong Kong although it has significant operations in Silicon Valley and Taiwan, so it has not been included in many semiconductor and technology market passive indexes. While it would be tough for an activist to change the first reason (although a pointed letter that got some publicity couldn’t hurt), if an activist got the company to move its legal headquarters to Silicon Valley I think the multiple could literally double or better. The company would also be an accretive acquisition to virtually any U.S. semiconductor company (although MRVL would presumably not be allowed to buy them for antitrust reasons). If nothing else, the company could conceivably buy back 10% of the company per year just from internally generated cash, to say nothing of using the financial leverage that is increasingly employed by semi companies.

Catalyst

• Continued growth and forecast outperformance
• Stock buybacks
• Potential for activism pushing them to consider selling company or moving HQ to United States