$3.27
-0.03 (-0.92%)
Silicon Motion Technology Corp. (ADR) (SIMO)
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A fabless semiconductor company that designs, develops and markets universally compatible, low-power semiconductor solutions for the multimedia consumer electronics market.
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A $20 stock unfairly suppressed. Forward P/E (yr 09): 5.11; PEG Ratio (5 yr expected): 0.27; Price/Sales (ttm): 2.21; Price/Book (mrq): 1.75. No debt, lots of cash.
I believe the quickly deteriorating NAND market will have some impact on SIMO's second-quarter, but definitely not as devastating as that on SanDisk. I don't have time to write a comprehensive thesis today, but would like to point out several facts for you to consider and balance.
Negative factors for SIMO:
(1) Contrary to several others are saying here, there IS a NAND volume problem according to the SanDisk report. They clearly cited the drop of the sales volume and the consequential inventory pileup to be the major problem for Q2. So it's not just a unit price problem, which would not have been problematic for SIMO.
(2) Although SIMO has three technological groups (mobile storage, multimedia SoC, and mobile communication), the mobile storage group counts for 80% of the revenue. So any change in the sector is going to have a significant impact on the overall picture of SIMO.
Positive or mitigating factors for SIMO:
(1) Because SIMO supplies controllers, the NAND sales volume problem has a delayed effect on SIMO rather than an immediate problem like flash manufacturing companies are experiencing. For flash manufacturing companies, if the flash memory has not been sold, they've got a revenue problem. But for SIMO, by the time the flash memory is made, they already sold their controllers to the flash manufactures, so it is not an immediate revenue problem for them. This characteristics will at least partially mitigate the impact of NAND sales on SIMO's Q2. However, if this condition continues, we could see trouble emerging in the subsequent quarters.
(2) SanDisk's main problem is the US market, while SIMO has much less exposure to the US than SanDisk. However, I have no concrete data on this. I just know this is clearly the case. I believe SIMO's sales in China, South Korea and Europe count for the majority of their revenue. Could somebody provide some data on this?
(3) SIMO's other parts of the business, such as SSD controllers, multimedia SoC and mobile communication groups are growing rapidly. I believe this will somewhat offset the NAND problem they might be experiencing.
All eyes are upon Q2 next week (7/29) now. The current estimated EPS is $.44. If the market has some respect to the fundamentals of this company, SIMO would justify the current price even if the actual EPS misses that by 30% to hit $.30. But in a market like this, the fundamentals are less important than sentimentals, at least in the short term. If SIMO comes forth with an EPS even slightly lower than $.44 and a slightly less bright outlook, you can be sure that the market is not going to react favorably.
(Please, no, I'm not saying SIMO will miss the analyst expectation. In fact, I expect the earnings to come out online with the expectations, and I am long on SIMO.)
People were overwhelmed by the overall drop of the revenue. But a careful look at the numbers will tell you a different story. Most significantly, I believe the real culprit was an unusual oversupply of flash memory in Q1. The overall market of the flash memory is not coming to a sudden end, but has experienced a large fluctuation from Q1 to Q2, mostly caused by unplanned (or poorly planned) oversupply in Q1. In the case of SIMO, if the numbers of its mobile storage division for Q1 and Q2 had been averaged, we would have seen the stock staying around $15 after Q1 and remained above $12 after Q2. It's the unfortunate sequence of the numbers that threw the market into an emotional selloff. I provide actual numbers below to support my view. Q1: the net sales was $52.2 million, of which mobile storage products (such as flash memory card controllers) counted for $41.2 million, 79% of net sales in the quarter. The other two divisions, mobile communications and multimedia SoCs together were $7.79 million and $3.21 million respectively ($11 million total), about 21% of the net sales. Q2: Net sales in the second quarter totaled US$48.6 million, of which mobile storage products was $35.5 million, accounted for 73% of net sales, The other two divisions, mobile communications and multimedia SoCs were $10.2 million and $2.9 million respectively ($13.1 million total), about 27% of the net sales. As you can see, the sales were too good in Q1 for the mobile storage products. The average of the mobile storage product for Q1 and Q2 is $38.35 million, which would have given us Q1 and Q2 revenues of $49.35 million and $51.45 million respectively, which would have depicted a stable annual growth of 25%, instead of 50% in Q1 but 2% in Q2. Now, had the drop in Q2 been solely caused by weak consumer demand, averaging Q1 and Q2 would not depict an accurate picture of the future, because Q3 may see further deterioration. However, with a look at the entire industry of flash memory, I believe a significant part of the Q2 problem was caused by an unusual oversupply of Q1, not an inherent weakness in consumer demand. In SIMO's case, there is a 14% drop of mobile storage sales from Q1 to Q2. Because SIMO sold to the retailers not end customers, that drop is not the same as the consumer demand drop. There's absolutely no way that the retail of flash memory dropped 14% in a single quarter. The majority of that drop was caused by miscalculated retailers who bought too much supply in Q1. For this reason, I believe Q3 will stabilize, and quarters after that will continue to see growth in flash storage market. Currently, the biggest trouble is in the customer products which include USB flash drive controllers and card reader controllers. Let's say these products will not grow. Let's also say that the much-talked- about outsourcing contract with a large flash drive manufacturer (everyone is assuming SanDisk) is not going to be helpful (way too conservative in assuming this), we would still see growth in the mobile storage division because the other parts of the storage business, such as SSD controllers and embedded flash controllers are growing fast. I particularly like the leading position of SIMO in SSD controllers. They may have the key to the wide adoption of SSD in mobile computing, which is still in an infant stage and is likely to see explosive growth in the future. The best part in the Q2 report, however, is the vast growth in the mobile communication division SIMO. This division showed a sequential increase of 31% (which translates to about 194% annual increase). This is not a one-time fluke, but a further strengthening of 129% annual growth over 2007. Even if the flash storage business were going to be flat in the future (which I believe is a very conservative assumption, see above), the mobile communication division alone could be generating a 15-20% annual growth to the total revenue of the company. There are good reasons why the mobile competition division is seeing such growth and will continue to see similar growth. Mobile TV tuners is one reason and CDMA RF ICs, and electronic toll collection (ETC) RF ICs are two others. The mobile TV tuners will be the distinguishing feature of the next generation cell phones, like cell phone cameras once was. But while those silly cameras have very little actual usage, mobile TV tuners will be actually used. I believe SIMO will grow from here. I sold my holding yesterday after hours (acted a bit too slow but still glad I did), and will be buying at the current price around $7.
The future of SIMO lies in SSD and mobile TV, not in cheap conventional flash controllers for mobile storage. Mobile TV business is growing at a speed faster than doubling every yea. Specifically, it grew 129% (more than doubling) over 2007 and is currently going at a sequential 31% growth which is close to annual 200%, i.e., tripling.The SSD will also be a very interesting story. SIMO is the leader for SSD based on SLC. But at this point, SSD has not been widely adopted. Much cheaper MLC technology must replace SLC in order for SSD to become widely adopted. The biggest challenge for MLC is that it has a relatively less durability (the read and write cycles allowed on the drive). Although companies such as Toshiba have been making progress to improve the inherent durability of MLC, SIMO has now come up with a smart idea of using hybrid SLC/MLC controller. The controller is able to analyze the incoming files from the host and intelligently move frequently accessed data to SLC NAND and non-frequently accessed data to MLC NAND. Because frequently accessed data only counts for a small portion of all data, an SSD haivng only a small MLC portion will significantly improve the durability of the entire SSD. This way, the overall durability of the SSD drive is significantly enhanced without any breakthrough of the hardware of the driver itself. With this innovative hybrid architecture, the SSD system cost is significantly reduced to a level comparable to a pure MLC-based SSD, while endurance is significantly enhanced and comparable to a pure SLC-based SSD. If Toshiba improves the inherent durability of MLC in the future, all the better. But the hybrid controller of SIMO already makes SSD a compelling choice for a broad range of computing systems, from ultra-mobiles to mainstream notebooks, and perhaps even desktops in the future. This could pose a serious threat to hard drives.Although the picture of Q3 remains unclear, the future of SIMO is bright. For traders, you may take the chance that the investors might not realize the value of SIMO until much later this year. But for long-term investors, you will not have a better buying opportunity than now.
Sorry, I meant "an SSD haivng only a small SLC portion will significantly improve the durability of the entire SSD." But I don't think many of you are interested in such technical details. For the record anyway.