A name that I've gotten a startling number of messages about is Silicon Motion (SIMO). I've written extensively about this name in the past (see here) and have been bullish for quite some time, as I believe that the Street is not fully baking in the real revenue growth opportunity that lies before the company in 2014. While the stock seems to be stuck in a tight trading range following a rather nice move up (12% since my Nov. 3 piece), the catalyst that will drive the next leg up/down is coming over the next few months.
The Samsung Question
While Silicon Motion's eMMC flash controller business is booming (and set to get a lot better next year with the addition of a third flash partner) and while the company's foray into the SATA solid state drive controller market could end up bearing significant fruits, the focus over the next couple of months is going to be on whether Silicon Motion wins back RF transceiver sockets in Samsung's phones next year.
As I've outlined in previous pieces, the company's RF transceivers are custom-built to be paired with Samsung's cellular baseband processors. These aren't, as some may believe, commodity chips, but rather the result of a very tight collaboration between the cellular baseband team and the transceiver team.
The good news, then, is that Samsung would find it pretty difficult to simply design Silicon Motion out of a handset that utilizes Samsung's cellular baseband chips. The bad news is that if Samsung's baseband efforts fall flat (and cellular baseband has been exceptionally difficult for anybody but Qualcomm (QCOM) to really get right), Samsung's next generation phones would just end up either using Qualcomm solutions or, if Intel stays true to its schedule, Intel cellular modems and RF transceivers.
How Close Is The Company To A Straight Answer?
The company recently presented at the UBS Global Technology conference and I found this excerpt from the conference transcript to be particularly illuminating,
Samsung's LTE-Advanced baseband is currently in testing at Samsung mobile right now, our LTE-Advanced transceiver is also currently in testing at Samsung, and together the paired chips are also in testing. So depending on how well the testing progresses and we believe it has been progressing fairly smoothly to date, we feel we have a good chance of getting back into the major programs at Samsung.
But as I mentioned, we are still in testing, so there are a lot of milestones that we still need to meet before we can start taking about whether we're going to be generating LTE revenue next year or how fast we're going to be able to grow this business again. But in the meantime, we feel we are strategically well-positioned. Samsung strategically is keen to use more of their own silicon, and we are part of their integrated solution that we're bringing to their mobile handsets.
As of Nov. 20, the transceiver and Samsung's LTE-A baseband were "in testing" and there wasn't much visibility into whether the company would be generating LTE revenue in 2014 or just how large that revenue opportunity is. This is discouraging as this almost surely rules out Silcion Motion winning sockets in the next round of Samsung devices that will launch around the Mobile World Congress timeframe (although Samsung is constantly launching new handsets, which is in stark contrast to how Apple does business). However, if Samsung can successfully transition to its own baseband silicon in a meaningful number of designs then things look good for Silicon Motion's RF transceiver business.
Some Things To Consider
It's worth it to step back and consider that, in light of the recent very aggressive cellular roadmaps presented by Qualcomm, Intel (INTC), and Broadcom (BRCM), Samsung moving back to its own modem silicon (and thus Silicon Motion getting LTE business back) isn't guaranteed. If any/all of these three players can produce better chips than what Samsung's internal teams can do, then Samsung will not use its own designs.
In fact, it would not be a surprise longer term if Samsung were to simply stop designing its own apps processors and modems and relied exclusively on third party vendors. Does Samsung really want to spend all of this money to save a a few dollars on the chips that go into its phones? The real profits for Samsung come from the actual device sales as well as from providing foundry services for the likes of Qualcomm. While moving to internal silicon would save a couple of dollars, it is not worth compromising the competitiveness of the product to do so.
In that case, Silicon Motion would probably need to shut down its RFIC division and sell the assets. This could end up being a positive for shareholders as it would not only cut R&D expenses (there are no meaningful LTE revenues today, anyway), but it could also fetch the company a non-trivial sum that could be used for buybacks or a special dividend.
Conclusion
In the worst case, Silicon Motion gets rid of its RF teams, sells the assets, and simply continues to focus on its storage controller business, and best case, the company sees LTE revenues return. While I do expect that we'll get a more concrete update on whether meaningful LTE revenues return in 2014 by February, aggressiveness on the parts of Qualcomm, Intel, and Broadcom pose a real threat to Samsung's internal cellular efforts.
At $14 the stock is still cheap at about 10x TTM earnings ex-cash, but the stock really depends on whether Samsung uses the company's parts or not. If it does, then EPS will grow quickly and the shares could top $20 in short order, but if it doesn't, then the stock will probably stay in a $11-$14 trading range. The risk/reward looks good, but it's not as screaming of a buy as it was back in the $10-$12 range.
Disclosure: I am long INTC, BRCM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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