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Is Silicon Motion's (NOW) Place in Your Portfolio Justified?

Zacks Equity Research

Silicon Motion Technology Corp. SIMO remains well-poised for growth, driven by synergies from acquisitions and improving NAND supply environment. This Zacks Rank #3 (Hold) stock bears immense potential owing to a few good growth drivers. However, growth momentum might get hindered by stiff competition and macroeconomic risks like political, economic and social instability.

Shares of Silicon Motionhave gained 14.9% in the past three months, significantly outperforming the industry’s 5.2% rally.

Let’s now delve deeper and take a look at some of the aspects aiding the company’s performance.

Key Drivers

Silicon Motion is a leading developer of microcontroller ICs for NAND flash storage devices and specialty RF ICs for mobile devices.

The company is anticipated to benefit from an improving NAND supply environment. Management expects the increase in the availability of 64 layer 3D NAND to bring down the high NAND prices, which will eventually improve the financial results. Moreover, improved supply of NAND flash is expected to drive growth of Ferri and Shannon SSD solutions.

Silicon Motion is active on the acquisitions front too. The company’s buyouts include FCI, Centronix mobile tv and Shannon systems. These acquisitions have helped it to augment foothold in the mobile communications market.

Moreover, the company outshines peers in providing resources for research and development. It develops affordable versions of TLC NAND flash as well as high-density 3D NAND. Moreover, Silicon Motion’s robust liquidity position has allowed the company to undertake diligent capital deployment initiatives that supplement long-term growth.

We also believe that an expanding product portfolio is the key catalyst.

Silicon Motion outpaced the Zacks Consensus Estimate in two of the trailing four quarters, delivering a positive average earnings surprise of 2.1%.

Growth Projections

For 2018, the Zacks Consensus Estimate for earnings per share is pegged at $3.18 and revenues of $578.8 million, representing a year-over-year increase of 22.4% and 11.1%, respectively.

Risk Remains

Intensifying competition in the USB flash drive controller market remains a major headwind.

Moreover, we note that Silicon Motion currently has a trailing 12 month Price/Book Value (P/B) ratio of 3.77. This level compares unfavorably with what the industry witnessed over the last year. The ratio is higher than the average level of 3.41. Hence, valuation looks slightly stretched from a P/B perspective.

Key Picks

NVIDIA Corporation NVDA, DXC Technology Company DXC and Analog Devices, Inc. ADI are some better-ranked stocks in the same sector. All the three companies flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA, DXC and Analog Devices have a long-term earnings growth rate of 10.3%, 10.5% and 10.4%, respectively.

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