- SSD shipments, including enterprise SSD, are expected to witness double digit growth.
- As the second largest merchant supplier of SSD controllers, Silicon Motion is set to buck the trend.
- Valuation is favorable revealing ~20% upside.
Silicon Motion Technology (SIMO, Financial) is one of the largest suppliers of SSD controllers. The company is exposed to multiple avenues of growth including client SSD, enterprise SSD and general NAND. Sales of SIMO's SSD controllers increased ~100% sequentially during the most recent quarter. Further, acquisition of Shannon Systems beefed up Silicon Motion's enterprise front amid inclusion of enterprise class PCI-e SSD array solutions. The company is investing aggressively in R&D to stay ahead in technology development. Customers like Samsung (SSNLF) and SK Hynix will help the company ride the NAND wave. More importantly, SIMO offers growth at a very reasonable price. Earnings are expected to grow at ~20% p.a. while forward PE stands at around 14. Detailed thesis follows below, but first, let's explore SIMO's products and revenue streams.
Silicon Motion is a technology company that belongs to the industry of diversified electronics. The company is primarily involved in the design of semiconductor microcontrollers for SSDs and eMMCs. The company also offers RF ICs including transceivers for mobile devices. Silicon Motion claims that it is a provider of LTE transceivers for Samsung's smartphones and tablets. Customers of the company include Samsung, SK Hynix and Micron (MU) etc. The companyserves two end markets: Mobile Storage and Mobile Communication.
Mobile Storage: This segment includes microcontrollers for SSDs, eMMCs and other NAND applications. Apart from that, the company also designs and develops controllers for removable storage products including NAND memory card controllers and USB flash drive controllers. Mobile storage is the largest revenue generator for Silicon Motion. The segment brought in $241.6 million, or 83.5% of the total revenue, during 2014. This segment is also witnessing growth, 30% top-line y/y growth posted during 2014.
Mobile Communication: Key products from this segment include LTE transceivers and mobile TV SoCs including mobile TV tuners. As mentioned above, Silicon Motion is a supplier of LTE transceiver to Samsung. LTE deployment is China is expected to boost SIMO's revenue from this segment. 29% y/y growth was experienced by this segment during year ended 2014, thanks to increased Mobile SoC sales. Mobile Communication segment brought in ~14% of the total revenue during 2014.
(click to enlarge)Â Source: 2014 20-F
With much dependency on the mobile storage market for revenue, Silicon Motion is exposed to the growth prospects of NAND especially SSD.
Geographically, the majority of SIMO's net revenue came from outside the United States.
Source: 2014 20-F
91% of the revenue was generated from countries other than U.S. during the year ended 2014.
From a customer vantage point, revenue is concentrated among small number of customers. 64% of the company's revenue came from five large customers, see form 20-F, which makes Silicon Motion quite sensitive to design losses.
Industry Prospects
According to Semiconductor Industry Association, growth of 9.9%Â during 2014 was backed up by the increased demand for smartphones and automotive electronics during 2014. Memory was the fastest growing segment, increasing 18.2 percent in 2014.
Gartner states that smartphones, SSDs and ultramobiles will experience the largest dollar increases in 2015.
"The market is being driven by strong growth in application-specific standard products (ASSPs) in smartphones, along with DRAM and NAND flash in ultramobiles and solid-state drives," said Gartner.
According to another study, enterprise SSD unit shipments will grow at an annual average of 32% through 2018.
"The penetration rate of SSD applications is expected to experience vigorous growth in 2015 thanks to the reduction of related costs and the development of new controller chips", according to Digitimes Research.
There is no need for us to reiterate the need for more storage and faster access. These growth trends are expected to benefit Silicon Motion as the company generates most of its revenue from storage solutions.
Thesis
Our thesis is based on following factors:
Fast time to market differentiates Silicon Motion from the competition. The company brings its controllers quickly to the market. For instance, Silicon Motion became the first company to support Micron's 16nm TLC NAND recently. According to Tom's Hardware,
"Silicon Motion works with leading SSD industry partners to deliver products to market quickly. Over the last three days, several partners have commented to us about how easy it is to work with Silicon Motion and how quickly the partnership bears fruit."
Positive reviews for the SSD controllers and new design wins bode well for the company. Micron replaced its Marvell (MRVL, Financial) controller in the MX100 with Silicon Motion's parts. AanadTech has the following to say about it:
"The BX100 is the first drive from a NAND OEM to ship with a Silicon Motion controller, so that is certainly a big design-win for the company. I've been pretty pleased with the 2246EN and it has done well in our tests, so I can see why Crucial chose to go with that one."
In another place Anandtech mentions that SIMO is gaining traction it terms of market share, thanks to its partnerships with SanDisk and Micron. Another review points out that Silicon Motion will appear in a lot more SSDs going forward. Overall, there are clear indications for the growth of SIMO's SSD business. As mentioned above, 100% sequential growth was witnessed during quarter ended 2015. It seems SSD controllers' growth will act as a catalyst for SIMO's stock
Silicon Motion is expected to witness double digit growth going forward. For starters, the management is expecting an increase of 5% to 10% in Q2 revenue sequentially while full-year top line growth projection ranges from 17% to 23%. Double digit growth expectations in the current year is the very reason Silicon Motion is an attractive play.
Acquisition of Shannon Systems bodes well for Silicon Motion Technology. Shannon Systems is a leading supplier of enterprise-class PCI-e SSD and storage array solutions to Chinese internet companies. Shannon exposes SIMO to the growth of enterprise SSD market in China. iResearch consulting group expressed its views regarding China's internet economy. The group stated that revenue of China's internet economy grew by 47% during 2014, which was mainly driven by mobile internet. The group also expects the revenue to progress further in the future and might cross 2 trillion Yuan barrier in 2018.
All in all, the agreement to acquire Shannon Systems will adds value to the combined company in the form of increased earnings and synergy benefits.
Analyst sentiment is positive for SIMO. Majority of sell side analyst rate SIMO a buy. Brean Capital hold a buy rating for SIMO with a price target of $37. Analysts at B. Riley reiterated a buy recently. Analysts from Standpoint Research upgraded SIMO to buy and a set price of $38. Finally, analysts at Topeka Capital Markets elevated their target price from $32 to $39.
SIMO's aggressive R&D spend points toward bright future ahead. R&D expenditure is of utmost importance especially in IT industry in order to stay ahead of the pack. A significant amount of SIMO's resources are utilized on research and development. During the last three years, SIMO spent a cumulative $156 million on R&D. The company spent 21% of its revenue on R&D during 2014. Aggressive R&D is always positive for future prospects of a given company. For instance, Silicon Motion became the first company to support Micron's 16nm TLC NAND recently; R&D can accelerate time to market, and hence, market share for SIMO going forward.
Valuation
Silicon Motion's earnings are expected to grow at ~20% p.a. during the next five years. For valuation purpose we are assuming a growth rate of ~15 p.a. for the next five years. Valuation based on PE and EVA approaches follow below:
Assumptions
- CAPM is used to calculate the cost of equity. S&P returns are assumed to be a good proxy for marker returns.
- 15% earnings growth is assumed for the next five years. No growth is assumed in perpetuity.
- Zero dividend growth is assumed while outstanding shares are assumed to remain constant.
- A multiplier of 15 is used for PE valuation, in line with our 15% growth assumption for the stock.
- Long term PE valuation is discounted to reflect the present value of the stock.
Short-term PE valuation reveals that Silicon Motion is fairly priced; the stock trades at ~14 times forward earnings. However, due to double digit expected growth, a long approach may be suitable. A discounted long term valuation based on 15x multiple reveals around 23% upside.
Focus Equity, Soid Ahmad
EVA based approach also reveal an upside of around 20%. Note that valuations are based of 15% p.a. growth while analysts are expecting 21.9% growth for SIMO during the next five years. Therefore, 20% upside projection is cautious; the stock may trend even higher.
Overall, given Silicon Motion's exposure to SSD growth, especially enterprise SSD, exposure to China's internet businesses, thanks to Shannon's acquisition, intensive R&D approach, double digit expected growth and favorable valuations, the stock is a buy with least 20% upside.
Thesis Risk
There are some risks attached to the growth of Silicon Motion.
- As revenue concentration is uneven across customers, a design loss from a major customer can have a material impact on Silicon Motion and our thesis.
- Since 95% of the company's sales are denominated in the U.S. dollar, strengthening dollar can force the customers to look for cheap suppliers or SIMO will have to forego margin. These risks can adversely the above thesis and our opinion if they are to materialize.
