You can find part one on Silicon Motion Technology Corp. (ADR) (NASDAQ:SIMO) here.
Part one summary: Silicon Motion Technology Corp. (ADR) (NASDAQ:SIMO) appears cheap trading at a forward P/E of 9.3, after stripping out cash; around half the average valuation for companies in the diversified electronics sector. On the other hand, the company is suffering somewhat of a slow-down as third quarter net income declined 39% year-on-year and revenue slipped 26%.
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It would appear that the reason behind this slowdown is two-fold. Firstly Silicon Motion Technology Corp. (ADR) (NASDAQ:SIMO) and is management have been going through a ‘transition year‘, positioning the company for longer-term growth after several years of rapid growth. In particular, Silicon Motion has grown explosively during the past few years as the company has ridden the wave of smartphone development, the rise of the Samsung in the mobile market and high attach rates of memory cards with smart phones.
Decline in Silicon Motion’s bundle rates of memory cards
However, Silicon Motion Technology Corp. (ADR) (NASDAQ:SIMO)’s management reports that bundle rates of memory cards for smartphones have declined somewhat during the past year or so, for a rate of 80% to 90% to only 10% to 20%. For the most part, this is why Silicon Motion’s revenue has taken such a hit over the past year. Still, now this transition is over, Silicon Motion is extremely well-positioned to stage a comeback during the next few years. Specifically, while revenues from bundled memory has declined the company has been working hard to drive growth in other markets. Silicon Motion’s eMMC controllers, memory for mobile devices, now account for up to 10% of the mobile device memory market, which is up from 0% at the beginning of last year. Silicon Motion now supplies eMMC devices to Apple and Samsung as well as other market leaders. Management is aiming to take the company’s eMMC market share up to 15% to 20% of the global market during 2014.
Changes in Silicon Motion’s LTE division
Elsewhere, Silicon Motion Technology Corp. (ADR) (NASDAQ:SIMO)’s LTE division has also been going through some changes but this division is unlikely to report a return to growth until this or even next year. Silicon Motion is the producer for the custom-designed LTE chip for Samsung handsets; however, Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) is now moving over to a LTE-Advanced technology, which Silicon Motion as of yet, does not produce. Silicon Motion is working on a LTE-Advanced product but this is unlikely to be ready for several quarters, meanwhile, other competitors are stealing its sales. Nevertheless, Silicon Motion has a number of products launching during this first quarter which could boost the company’s prospects.
So then all in all, Silicon Motion is cheap as the company has been going through a transition stage but now it looks well positioned to make a comeback. This is not a traditional value investment, the company looks cheap, has plenty of cash and is in the midst of a turn-around.