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Summary of Operations
Silicon Motion Technology Corporation (SIMO) produces and sells flash memory products. The company makes its own designs and then sends these to independent manufacturers to create and test the product, thus making R&D its biggest expense. These finished products are then sold to SIMO’s customers. TSMC and SMIC are the main manufacturers of their semiconductors. ASE, SPIL, and KYEC are primary partners in the testing space.
In 2020, a slight majority of sales were SSD (solid-state drive) controllers. Their products are sold to other manufacturers to assemble their own products. Five customers made up a majority of their sales. These include big names like Micron, Samsung, and Intel. The semiconductor industry is both seasonal and cyclical. This is especially true for SIMO’s products, which are oriented toward consumer goods and have shorter lifespans.
Sales are also regionally concentrated, with a slight majority being sold in China, Taiwan, and Singapore.
Strategy
SIMO believes this outsourced model allows its to avoid heavy capex that would come from having their own vertical operation for this stage of the process. On top of that, the company prefers to be financially self-sufficient, maintaining a large cash position and having almost zero debt. Occasionally, it acquires other businesses to expand its portfolio of products.
Growth and the Future
The semiconductor market being volatile, there are always dangers of cancelled orders and stagnant inventory that becomes obsolete. There are the other dependencies listed above to consider. That said, its operating margins typically range from 25% to 30%. That’s not worrisome at all.
With the current supply shortage and the growing need of chips, as well as the emerging Internet of Things, it’s reasonable to assume that the arc of this volatility will bend toward growth. Since it doesn’t seem to know the word “debt,” it’s unlikely to find itself in serious trouble, and it has a modest buyback program to boot. The question is the price.
Valuation
Over the last decade, SIMO averaged $76 million in FCF per year and had a CAGR of 12.5%. Let’s assume they can do $100 million in FCF as a baseline going forward.
Growth Assumptions: 12% first 5 years; 10% second 5
Intrinsic Value Per Share: $43
Net Cash Per Share: $2.61
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