Buying SIMO - Silicon Motion Technology Corp

What Does Silicon Motion Technology Do?

Silicon Motion Technology Corporation (SIMO) is a fabless semiconductor company that designs, develops and markets high performance, low-power semiconductor solutions for multimedia consumer electronics applications, such as mobile phones, digital cameras, notebook PCs, personal multimedia players, and personal navigation devices. Silicon Motion has three product lines: mobile storage, mobile communications, and multimedia SoCs. SIMO is a global leader in microcontrollers for NAND flash storage devices and silicon TV tuners for mobile phones.

The Bulls: Controller Market, Cash Flow, Market Niche

While it may be true that the semiconductor market is currently flooded with excess chips, causing prices to plummet and companies such as Micron (MU), Sandisk (SNDK), and Spansion (SPSN) to suffer, Silicon Motion Technology finds itself in a market where it is one of the biggest names in the business. That market is the controller market, which produces controller chips that drive flashcards and solid state drives (SSD's). SIMO's only real competitor is Samsung, they are continuing to generate plenty of cash, their margins are intact, and their stock price has suffered unexplainably.

Furthermore, on a fundamental basis, valuations look very attractive, and the company carries little to no debt. We feel this presents a unique buying opportunity.

The Bears: Controllers - Dying Market and Falling Demand

Silicon Motion's stock price is getting pummeled for a reason. Chipmakers such as Texas Instruments (TXN) are building flash memory controllers directly into their chips. If the broader industry begins doing this as well, SIMO will find itself out of business. Historically, Silicon Motion has enjoyed a large cash buffer, and has been able to keep its inventory under control. However, over the past few quarters, Accounts Receivable (AR) and inventory have slowly begun spiraling out of control. The current economic climate does not treat such trends lightly. Look for SIMO to crash back to pink sheet status over the next couple years.