In the Q4 2023 issue of Hidden Value Stocks, Mordechai Yavneh of Focus Capital highlighted his thesis for Silicon Motion (NASDAQ:SIMO). We're now approaching the one-year mark since he shared his idea, so it's a good time to take a look at where the company stands now and how the thesis has played out thus far.
Silicon Motion shares slump
We also checked in with Yavneh for an update on his views of Silicon Motion. Unfortunately, Silicon Motion shares are off 6% year to date and nearly flat over the past year. The stock tumbled after the company reported its third-quarter earnings results, coming up short on guidance expectations.
However, Focus Capital still owns shares of the company. Yavneh still firmly believes in his thesis, and Focus isn't the only hedge fund with interest in Silicon Motion. Insider Monkey estimates that about 43 hedge funds have a stake in the company.
Despite the slippage in SIMO's stock price, we're starting to see some interest in the shares. Silicon Motion recently became a trending stock for Zacks.
Additionally, the Jan. 17 $40 call options in SIMO shares notched some of the highest implied volatility of all equity options on the Monday before Thanksgiving. That suggested options traders were pricing in a large move for Silicon Motion stock.
In the days since, the shares have put up a five-day move of about 5% or so through early afternoon on Dec. 5. At this point, Silicon Motion is trading at a price-to-earnings ratio of around 12.45x.
Background on Silicon Motion
The company provides NAND flash controllers for solid-state storage drives and other SSD devices, serving as a designer, developer and seller of low-power semiconductor solutions for manufacturers and other customers. Silicon Motion's controllers are commonly used in smartphones, tablets, PCs and other devices, although the company is especially focusing on breaking into the high-end PC market.
During the third quarter, Silicon Motion posted a 23% year-over-year increase to $212.4 million as its net income nearly doubled to $20.8 million. In a recent interview with Hedge Fund Alpha, Yavneh noted that he had predicted the company's growth a year ago.
"I believe that our interview… has withstood the test of time very well," he said. "We were correct that Silicon Motion would be returning to growth and that their margins would recover to historical levels. In fact, for 2024, Silicon Motion grew their revenue more than 25%, and gross margins are ending the year at approximately 47%, up from the 42% exhibited over 2023. The NAND industry has recovered from the overproduction glut in the first half of 2023, and Silicon Motion has returned to its former profitability at a higher revenue plateau than before. This is exactly what we predicted, and this is exactly what happened."
The future of Silicon Motion
Yavneh feels the future is even brighter for Silicon Motion. On the latest earnings call, the company stressed that its design winners were stronger than ever as their market share grows. Yavneh also pointed out that NAND manufacturers are increasingly outsourcing, directly contradicting a key risk factor he feels the market is "overly obsessed with."
"They have won major design wins and market share in PCIe 5.0 controllers, allowing them to break into the high-end PC market, a market which they have not participated in until now," he added. "At the same time, their MonTitan enterprise NAND controllers for AI and datacenters have won a few Tier 1 customers with more to come, another greenfield opportunity for the company."
Market share growth
Yavneh reported that Silicon Motion has been growing its market share in its core markets, and he expects the company to continue to do so with additional design wins. Meanwhile, he looks for the company to reveal even more significant design wins in new markets, representing new growth.
"Silicon Motion will not formally announce 2025 guidance until Q4's earnings are released [likely in late January/ early February], but they have already indicated that they expect growth to continue, especially as they ramp up their new markets in the latter half of next year," Yavneh said.
He also continues to see Silicon Motion as a gem within its industry.
"Over the span of this industry downturn and recovery, they have retained and grown their market share, and they continue to grow their design win share, boding well for future continued growth," he added. "Through all this, cash continues to pile up on their balance sheet, part of which is returned to shareholders via dividends and share buybacks, as we wait for the market to catch up to the tremendous performance of Silicon Motion's business."
“An amazing deal”
It sounds like Yavneh will be sticking with Silicon Motion for the long haul, and he expects the market to eventually notice the company's tremendous growth.
"We continue to believe that Silicon Motion is an amazing deal at these price levels, and we believe that as they continue to grow revenue, margins, and profits, the market will eventually catch on, particularly as their growth continues to lay to rest the market’s fear of insourcing," he said. "The truth is that as smaller nodes (e.g., 6 nm) are more expensive to develop controllers on, it increasingly makes little economic sense for the NAND manufacturers to insource controllers with limited volume over which to amortize their development costs."
Of course, no one has a crystal ball that will tell them how long it will take for Yavneh's thesis to play out, but he said the stock will have to come in line with the underlying business sooner or later.
"As Benjamin Graham has famously said, in the short term, the stock market is a voting machine, but in the long term, it is a weighing machine," he concluded.
