This tech stock is on the rise, and is looking for double-digit revenue gains this quarter.
Silicon Motion Technology Corp. (SIMO)
From Cabot Emerging Markets Investor
This company is a slightly conservative one, a Taiwanese fabless chip maker (no in-house manufacturing) that specializes in microcontrollers for flash memory, the solid-state storage medium for virtually every mobile device out there.
Silicon Motion Technology Corp. (SIMO) was founded in Silicon Valley in 1995, but it’s now a Taiwanese powerhouse with an especially strong relationship with South Korean tech manufacturers. Silicon Motion is a global leader in designs for solid-state memory device controllers, buses and memory storage products, and its designs are included in more flash products from Intel, Micron, Samsung, SanDisk, SK Hynix and Toshiba than any other company. The company also offers systems-on-a-chip solutions for mobile TV and LTE mobile transceivers.
In addition to its in-house design innovations, Silicon Motion used the acquisition route to add enterprise-grade connectors for the Chinese data center market with its 2015 buyout of China-based Shannon Systems. And the company has made inroads in the German luxury car market with its FerriSSD memory system.
The company’s design and research expertise has kept revenue growing for years. (A 20% decline in 2013 came after a three-year stretch when revenue grew by an average of 48% per year. The two subsequent years saw 28% and 25% growth, respectively.) And because the company doesn’t operate chip factories, overhead is low, yielding after-tax profit margins that have topped 20% for the past six quarters. 2016 estimates call for a 27% increase in earnings per share.
The immediate fuel for Silicon Motion’s popularity with investors is the April 7 release of preliminary first quarter results that predicted a 14% to 15% jump in revenue over the previous quarter; prior guidance had been in a range from a 2.5% gain to a 2.5% loss. The company also said that its gross profit margin would be in the upper half of its original guidance.
But the larger story buoying Silicon Motion’s stock is the widespread return of investors’ appetite for tech stocks, which have been out of favor for months. SIMO has been in a long-term uptrend since the middle of 2013, but a three-month pullback in 2014 and another in 2015 made it just about impossible for growth investors to stick with it.
SIMO went flat last December, eventually falling from 34 as the month began to a floor of support at 27 in January. A recovery to 34 at the beginning of March completed a cup-shaped pattern with a two-week handle at 33. Technically, this was the perfect setup for SIMO’s March–April rally. SIMO is now trading in blue-sky territory, making new all-time highs in late March before correcting briefly to its 25-day moving average, then jumping ahead again. The stock consolidated briefly under resistance at 40 before breaking out. The stock pays a dividend with a 1.5% annual yield and trades at a reasonable 19 P/E ratio. We recommend buying SIMO.
Paul Goodwin, Cabot Emerging Markets Investor, www.cabot.net, 978-745- 5532, April 21, 2016