Silicon Motion Technology Corp. (ADR) (SIMO)

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.)