Here's Why Silicon Motion (SIMO) is a Smart Investment Option

Shares of Silicon Motion Technology Corporation SIMO have risen 7.6% over the past year, driven by healthy revenues on the back of a flexible business model and a quick time-to-market schedule to meet clients’ evolving needs. Earnings estimates for the current fiscal year have increased 60.3% over the past year, while that for the next fiscal year has risen 71.5%, implying robust inherent growth potential. With healthy fundamentals, this Zacks Rank #2 (Buy) semiconductor firm appears to be a solid investment option at the moment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Growth Drivers

Silicon Motion has established itself as the leading merchant supplier of client SSD controller to module makers, including most market leaders in the United States, Taiwan and China. Most of the company’s clients are ditching MLC flash for TLC flash. This has made the company focus on manufacturing SSD controllers that can manage TLC flash. Going forward, Silicon Motion believes the market will be dominated by SSDs that use TLC flash, which will further bolster their use in PC’s, thereby displacing mechanical hard disk drives (HDDs). As TLC SSD offers higher performance and competitive advantage over HDDs, PCs are increasingly adopting them. Furthermore, the company believes a majority of its client SSD controller will be used for managing 3D flash.

The company appears to be well-equipped to adapt to industry changes. It has collaborated with flash vendors to develop proprietary controller technology to overcome the existing weakness of 3D NAND and outshine peers. The company has commenced initial sales of 3D SSD controllers to flash partners and expects this controller to be a significant SSD controller growth driver for the next year, as NAND Flash partners’ 3D capacity expands. Also, it commenced mass production of PCIe NVMe client SSD controller for flash partners. We believe accelerated product sales and favorable industry trends signal bright prospects for Silicon Motion.

The company has also rolled out SM3282, a single chip flash controller featuring accelerated performance and high storage capacity capabilities for cost-efficient external SSDs. Silicon Motion expanded its SSD controller program engagements with PC OEMs and eMMC/UFS controllers for smartphones, automotive applications and IoT/smart devices. The company is adding to this momentum with the upcoming launch of its next-generation enterprise-class SSD controllers. Silicon Motion’s eMMC is showing strong signals of rebound, thereby adding to the strength of its overall embedded storage market that comprises both SSD controllers and eMMC embedded memory. As market trends suggest that the balance is gradually tilting from eMMC 4.5 toward eMMC 5.0, the company foresees lucrative prospects for eMMC 5.1 controller sales. We believe an expanding customer base and innovative products will likely act as tailwinds for the company’s top-line growth. Over the last decade, Silicon Motion has shipped more than 5 billion controllers cumulatively – more than any other company in the world. On a yearly basis, Silicon Motion ships more than 750 million NAND controllers. We remain impressed with the inherent growth potential of the stock.

With a VGM Score of B, the stock delivered an earnings surprise of 10.4%, on average, in the trailing four quarters. The stock has a long-term earnings growth expectation of 9%.

Other Key Picks

Cirrus Logic, Inc. CRUS, carrying a Zacks Rank #2, is a solid pick for investors. It has a long-term earnings growth expectation of 10% and delivered a modest earnings surprise of 16%, on average, in the trailing four quarters. Earnings estimates for the current year for the stock have moved up 27% since March 2021, while that for the next year is up 16.8%.

Cirrus Logic has broadened its product portfolio and now its chips are used in DVD players, disc drives, sound chips for computers, XBox, professional audio, mobile technologies and voice transmission. Growth opportunities in voice biometrics and closed-loop controllers are likely to be the key drivers in the long term. Sustained focus on expanding the product portfolio will help Cirrus Logic gain new customers, thereby driving revenues.

Broadcom Inc. AVGO, carrying a Zacks Rank #2, is another key pick. It has a long-term earnings growth expectation of 14.5% and delivered an earnings surprise of 1.9%, on average, in the trailing four quarters.

Broadcom’s focus on multiple target markets mitigates operating risks and lessens the exposure to volatility in any single market. The company is well-positioned to address the needs of rapidly growing technologies like IoT and 5G. Broadcom’s extensive product portfolio, which serves multiple applications within four primary end markets, will likely help it to gain significant market share going ahead.

Advanced Micro Devices, Inc. AMD, sporting a Zacks Rank #1, is a solid pick. It has a long-term earnings growth expectation of 29.1% and delivered an earnings surprise of 17%, on average, in the trailing four quarters.

In order to diversify its business beyond the slowing, transitioning PC market, AMD is enhancing its semi-custom chip business, which has been performing well to date. It has attained a leading market position in the microprocessor and graphics processing markets. AMD plans to expand its semi-custom business into other high-growth markets such as the semi-custom ultra-low power client, embedded, dense server and professional graphics markets where it can offer differentiated products that use its APU and graphics IP.

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