SiliconMotion of the Ocean - Mega Memory Upside Round 2 $SIMO

I'm posting this before SIMO gets away from everyone as its recovering faster than I'd hoped. I will continue updating. "Put on your bull glasses and SIMO gains" - Dr. Doolittle, animal ophthalmologist KEY POINTS SIMO is THE BEST way to play memory Under the radar stock in the memory supply chain, a derivative play with massive upside MU makes up 25% of revenues, followed by other major memory & semi companies; recovery = SIMO alchemy Wave of Upcoming Catalysts Cheap Calls = Massive Upside on semis price recovery Consensus Price Target: $110 (>50% Upside) Sections Company Description Thesis Current Valuation & Financials Technicals Upcoming Catalysts How to Play Appendix Company Description Silicon Motion is the leading maker of controllers in the memory, storage markets, and specialty RF. Their chips power data centers, mobile devices, SSDs, autos, and multimedia hardware (video walls, tablet tech, medical equipment, etc). Their customers are key members of the supply chain (i.e. Micron, Samsung, SK Hynix, etc) and supply some web service providers directly (I.e. Alibaba). All of their customers are ramping production, further accelerating demand for SIMO’s products. Micron accounts for 25% of SIMO's revenues. Thesis SIMO is significantly undervalued at current levels, getting caught in the indiscriminate market-wide selling over Q1 that has brought semis in to bottom barrel valuations. This has created an AMAZING opportunity to not only double dip, but also enjoy even stronger tailwinds from even better fundamentals than we had in Q4! I want to expedite the delivery of this DD, and I'll be beefing this section up throughout the day. For now, let me reiterate my Q4 investment thesis: This is a derivative play on memory (Tip: supply chain stocks always have more leverage) and a superior play for cyclical upturns (we are now entering). What do I mean by derivative play? Imagine Micron is a SpaceX rocket taking off. Close your eyes and feel the experience of starting the boosters, lifting off, and gradually accelerating to space. Now imagine SIMO is a monkey strapped into a shopping cart connected to that rocket by a long chain that suddenly goes from 0 to 99,999mph. Get it? Got it? Good. More importantly/hilariously, management has continued to keep racking up sales from strong demand all year which has proved resilient despite memory market softness and all while gaining new production capacity. Somehow, analyst estimates reflect neither of these factors. Mgmt guided $1.5B in backlog being pushed into 2022, yet according to analysts $1.5B in future sales is only worth $1B in sales on their estimates. Also worth considering, if this year was a FUD cyclical trough, and next year is a reacceleration period into a decade of increasing memory demand, then 2021’s $1B in sales probably wasn't "peak", was it? I'm no rocket scientist, but I'd say no. In other words, EPS estimates and valuation expansion are heading SIGNIFICANTLY higher. Luckily, Needham modeled this for us: SIMO's current guide is for $1.15bil, though after the recent capacity increase, expect this to go higher. Bottom line: SIMO is a monkey in a shopping cart about to be jerked up significantly by the recovering memory cycle during another decade of secular, exponential growth in memory needs from datacenters, EVs, consumer tech, mobile, and literally every facet of human life. This is a real stock that attracts real hedge funds. Get in early or forever hold your peace. Also, at an almost 3% fwd div yield vs the S&P's 1.3%, you and every dividend-loving Boomer PM can even get paid to hold shares <3 My post from November 2021: https://www.reddit.com/r/wallstreetbets/comments/r25o8a/tickle_me_simo_mega_memory_upside_v2/ Current Valuation & Financials Fwd P/E '22: 9x Earnings Growth Est: +41% '22 Remember last quarter when this was 11.6 before its big run? Thanks to fundamentals continually above analysts' admittedly conservative estimates, my target multiple for SIMO given their growth and secular tailwinds would be 15x P/E. If semis have an incredibly strong showing industry wide, that target would be 20x, justified by the above market growth. However, the historic cyclicality of the industry likely keeps the lid around 15x-17x. At current estimates, this would put the stock at $120-130 fair value. Fwd P/S ’22: 2.22x Revenue Growth Est: 24% '22 These are conservative according to the analysts that provided them in January. This is simply based on the expectation of incremental foundry supply from TSMC, which was expected to come online in Q1 & Q2. Analysts described Rev growth as "baseline", with upward revisions expected as capacity is expanded "materially higher" (Needham), further accelerating rev growth through '22. Last month (Feb) additional foundry capacity expansion for SIMO was reportedly a sizeable amount. For reference, the last capacity expansion for SIMO was 1Q21 which contributed 30% toward Rev growth. This will be further boosted by product mix as legacy controllers are phased out in favor of PCIe Gen4 controllers, a strong growth area in SSDs. But wait! There's more! PCIe Gen 5 enterprise controllers (think hyperscale, servers, etc) is ramping in 2H22, and presents another colossal growth oppty for SIMO. According to Needham, "We expect SIMO can generate $50-$100 ASP [in PCIe Gen 5] vs $4-5 for client SSD controllers in the enterprise market… estimated TAM $4-5Bn". Not bad for one segment of a company with a (now stale) guide of $1.15bil '22 revs. Keep in mind, upward Rev growth revisions flow through to all other financial metrics listed. EBITDA Growth Est: +111% '22 You read that right. Free Cash Flow Generation: +46% '22 Mgmt has expressed FCF will continue to grow and be allocated toward increasing shareholder returns (i.e. buyback budgets) Analyst Price Target: $110 Current analyst price targets range from $88 (Morgan Stanley of course, perma-memory bears lol) to $135. Median PT is $120. Technicals SIMO is currently rebounding after being caught up in the indiscriminate selling of the Q1 correction which drastically displaced it from underlying fundamentals. This is precisely why this oppty exists. It's currently exiting a downtrend and seeing strong relative strength gains vs its industry & sector. See Appendix for charts. Upcoming Catalysts Once again, a long list of event catalysts around the corner. SIMO 3/23 Bank of America APAC TMT Conference 2022 (SIMO; potential pre-guide and/or capacity updates) 5/5 SIMO ER Now - 4/5, 5/6 - SIMO has expressed desire to accelerate their buyback program. Outside of the 30day pre-earnings blackout period, buybacks should kick in big time Industry 3/23 U.S. Senate hearing on semis supply chain "Developing Next Gen Tech for Innovation", featuring execs from MU (25% revs) & INTC ($8.65% revs). Discussions will revolve around investment in Federal investment in semi mfg supply chains & America COMPETES Act 2022 & CHIPS for America Fund (potential $52bil to support US semi mfg fabs). Key Supply Chain Ers (~50% of Revs represented) 3/29 MU (25% Revs); this is THE biggest catalyst for SIMO, and thanks to current memory market dynamics, MU should have a total blowout 4/7 Samsung (3.3% Revs) 4/28 INTC (8.65% Revs) 4/28 Fujitsu (1.2% Revs) 4/28 SK Hynix (4.89% Revs) 4/29 WDC (4.23% Revs) 5/6 Arrow Electronics (2.2% Revs) How to Play Targeting a range of prior highs $97 to technical breakout to $110. Using ASK prices for returns (you likely get improved pricing, meaning higher final returns). Profits = % Gains - 100% (ex: if you double, that's a 1x profit). Gen X/Boomers: Buy stock! No brainer. Likely 40-50% upside from here Risk-Averse: June C75 returns profits of 3.5x-6.5x Quasi-Risk Averse: June C85 returns profits of 5.6x-11.5x Pump It Up!: May C80 returns profits of 6x-10.5x Super Pumped UP!: May C85 returns profits of 8.5x-17.5x WSB Delight: This is why you come here. If the conference acts as strong a catalyst as they did in Dec & MU earnings are enough to rocket this thing back to $85-95 (entirely possible), the best way to play is... April C80. These are trading so cheap, that a sprint back to $85-95 (15-30%) in the next 4wks would return 7.5x to 24x. ​ I'm continuing to buy all of the above. Appendix Required Daily Avg Moves through Exp For Target Ranges April $85-95: +0.88% to +1.5% May $95-110: +0.61% to +0.95% June $95-110: +0.42% to 0.65% ​ Moving averages & Q1 downtrend line from market-wide indiscriminate selling. A continued recovery will turn that 50D back up toward the 200D, forming the golden cross which is usually good for a technical-driven boost. Pink line is downtrend, which was decisively broken on 3/16. RSI also picking up as institutional buyers return to the stock after waiting out Q1 volatility. ​ Famous Illustration of Memory Cycles (which continue to be driven by secular need for bigger/better NAND/DRAM)

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SiliconMotion of the Ocean - Mega Memory Upside Round 2 $SIMO

bullish

I'm posting this before SIMO gets away from everyone as its recovering faster than I'd hoped. I will continue updating.

"Put on your bull glasses and SIMO gains" - Dr. Doolittle, animal ophthalmologist

KEY POINTS

  • SIMO is THE BEST way to play memory
  • Under the radar stock in the memory supply chain, a derivative play with massive upside
  • MU makes up 25% of revenues, followed by other major memory & semi companies; recovery = SIMO alchemy
  • Wave of Upcoming Catalysts
  • Cheap Calls = Massive Upside on semis price recovery
  • Consensus Price Target: $110 (>50% Upside)

Sections

  1. Company Description
  2. Thesis
  3. Current Valuation & Financials
  4. Technicals
  5. Upcoming Catalysts
  6. How to Play
  7. Appendix

Company Description

Silicon Motion is the leading maker of controllers in the memory, storage markets, and specialty RF. Their chips power data centers, mobile devices, SSDs, autos, and multimedia hardware (video walls, tablet tech, medical equipment, etc). Their customers are key members of the supply chain (i.e. Micron, Samsung, SK Hynix, etc) and supply some web service providers directly (I.e. Alibaba). All of their customers are ramping production, further accelerating demand for SIMO's products. Micron accounts for 25% of SIMO's revenues.

Thesis

SIMO is significantly undervalued at current levels, getting caught in the indiscriminate market-wide selling over Q1 that has brought semis in to bottom barrel valuations.

This has created an AMAZING opportunity to not only double dip, but also enjoy even stronger tailwinds from even better fundamentals than we had in Q4!

I want to expedite the delivery of this DD, and I'll be beefing this section up throughout the day. For now, let me reiterate my Q4 investment thesis:

This is a derivative play on memory (Tip: supply chain stocks always have more leverage) and a superior play for cyclical upturns (we are now entering).

What do I mean by derivative play? Imagine Micron is a SpaceX rocket taking off. Close your eyes and feel the experience of starting the boosters, lifting off, and gradually accelerating to space. Now imagine SIMO is a monkey strapped into a shopping cart connected to that rocket by a long chain that suddenly goes from 0 to 99,999mph. Get it? Got it? Good.

More importantly/hilariously, management has continued to keep racking up sales from strong demand all year which has proved resilient despite memory market softness and all while gaining new production capacity. Somehow, analyst estimates reflect neither of these factors. Mgmt guided $1.5B in backlog being pushed into 2022, yet according to analysts $1.5B in future sales is only worth $1B in sales on their estimates. Also worth considering, if this year was a FUD cyclical trough, and next year is a reacceleration period into a decade of increasing memory demand, then 2021's $1B in sales probably wasn't "peak", was it? I'm no rocket scientist, but I'd say no.

In other words, EPS estimates and valuation expansion are heading SIGNIFICANTLY higher.

Luckily, Needham modeled this for us:

SIMO's current guide is for $1.15bil, though after the recent capacity increase, expect this to go higher.

Bottom line: SIMO is a monkey in a shopping cart about to be jerked up significantly by the recovering memory cycle during another decade of secular, exponential growth in memory needs from datacenters, EVs, consumer tech, mobile, and literally every facet of human life. This is a real stock that attracts real hedge funds. Get in early or forever hold your peace.

Also, at an almost 3% fwd div yield vs the S&P's 1.3%, you and every dividend-loving Boomer PM can even get paid to hold shares <3

My post from November 2021: https://www.reddit.com/r/wallstreetbets/comments/r25o8a/tickle_me_simo_mega_memory_upside_v2/

Current Valuation & Financials

Fwd P/E '22: 9x

Earnings Growth Est: +41% '22

  • Remember last quarter when this was 11.6 before its big run? Thanks to fundamentals continually above analysts' admittedly conservative estimates, my target multiple for SIMO given their growth and secular tailwinds would be 15x P/E. If semis have an incredibly strong showing industry wide, that target would be 20x, justified by the above market growth. However, the historic cyclicality of the industry likely keeps the lid around 15x-17x. At current estimates, this would put the stock at $120-130 fair value.

Fwd P/S '22: 2.22x

Revenue Growth Est: 24% '22

  • These are conservative according to the analysts that provided them in January. This is simply based on the expectation of incremental foundry supply from TSMC, which was expected to come online in Q1 & Q2. Analysts described Rev growth as "baseline", with upward revisions expected as capacity is expanded "materially higher" (Needham), further accelerating rev growth through '22. Last month (Feb) additional foundry capacity expansion for SIMO was reportedly a sizeable amount. For reference, the last capacity expansion for SIMO was 1Q21 which contributed 30% toward Rev growth.
  • This will be further boosted by product mix as legacy controllers are phased out in favor of PCIe Gen4 controllers, a strong growth area in SSDs. But wait! There's more! PCIe Gen 5 enterprise controllers (think hyperscale, servers, etc) is ramping in 2H22, and presents another colossal growth oppty for SIMO. According to Needham, "We expect SIMO can generate $50-$100 ASP [in PCIe Gen 5] vs $4-5 for client SSD controllers in the enterprise market… estimated TAM $4-5Bn". Not bad for one segment of a company with a (now stale) guide of $1.15bil '22 revs.
  • Keep in mind, upward Rev growth revisions flow through to all other financial metrics listed.

EBITDA Growth Est: +111% '22

  • You read that right.

Free Cash Flow Generation: +46% '22

  • Mgmt has expressed FCF will continue to grow and be allocated toward increasing shareholder returns (i.e. buyback budgets)

Analyst Price Target: $110

  • Current analyst price targets range from $88 (Morgan Stanley of course, perma-memory bears lol) to $135. Median PT is $120.

Technicals

SIMO is currently rebounding after being caught up in the indiscriminate selling of the Q1 correction which drastically displaced it from underlying fundamentals. This is precisely why this oppty exists. It's currently exiting a downtrend and seeing strong relative strength gains vs its industry & sector.

See Appendix for charts.

Upcoming Catalysts

Once again, a long list of event catalysts around the corner.

SIMO

  • 3/23 Bank of America APAC TMT Conference 2022 (SIMO; potential pre-guide and/or capacity updates)
  • 5/5 SIMO ER
  • Now - 4/5, 5/6 - SIMO has expressed desire to accelerate their buyback program. Outside of the 30day pre-earnings blackout period, buybacks should kick in big time

Industry

  • 3/23 U.S. Senate hearing on semis supply chain "Developing Next Gen Tech for Innovation", featuring execs from MU (25% revs) & INTC ($8.65% revs). Discussions will revolve around investment in Federal investment in semi mfg supply chains & America COMPETES Act 2022 & CHIPS for America Fund (potential $52bil to support US semi mfg fabs).

Key Supply Chain Ers (~50% of Revs represented)

  • 3/29 MU (25% Revs); this is THE biggest catalyst for SIMO, and thanks to current memory market dynamics, MU should have a total blowout
  • 4/7 Samsung (3.3% Revs)
  • 4/28 INTC (8.65% Revs)
  • 4/28 Fujitsu (1.2% Revs)
  • 4/28 SK Hynix (4.89% Revs)
  • 4/29 WDC (4.23% Revs)
  • 5/6 Arrow Electronics (2.2% Revs)

How to Play

Targeting a range of prior highs $97 to technical breakout to $110. Using ASK prices for returns (you likely get improved pricing, meaning higher final returns). Profits = % Gains - 100% (ex: if you double, that's a 1x profit).

Gen X/Boomers: Buy stock! No brainer. Likely 40-50% upside from here

Risk-Averse: June C75 returns profits of 3.5x-6.5x

Quasi-Risk Averse: June C85 returns profits of 5.6x-11.5x

Pump It Up!: May C80 returns profits of 6x-10.5x

Super Pumped UP!: May C85 returns profits of 8.5x-17.5x

WSB Delight: This is why you come here. If the conference acts as strong a catalyst as they did in Dec & MU earnings are enough to rocket this thing back to $85-95 (entirely possible), the best way to play is... April C80. These are trading so cheap, that a sprint back to $85-95 (15-30%) in the next 4wks would return 7.5x to 24x.

I'm continuing to buy all of the above.

Appendix

Required Daily Avg Moves through Exp For Target Ranges

  • April $85-95: +0.88% to +1.5%
  • May $95-110: +0.61% to +0.95%
  • June $95-110: +0.42% to 0.65%

Moving averages & Q1 downtrend line from market-wide indiscriminate selling. A continued recovery will turn that 50D back up toward the 200D, forming the golden cross which is usually good for a technical-driven boost. Pink line is downtrend, which was decisively broken on 3/16. RSI also picking up as institutional buyers return to the stock after waiting out Q1 volatility.

Famous Illustration of Memory Cycles (which continue to be driven by secular need for bigger/better NAND/DRAM)

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Confidence
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