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  • Brandon Cao

Silicon Motion Technology: Great Fundamentals, Greater Merger

We have been analyzing Silicon Motion ($SIMO) since November 2022 and believe that it has good long term value, provided the proposed merger with MaxLinear falls through. More on that later.


As a global leader in supplying NAND flash controllers, Silicon Motion is a Taiwanese company that develops NAND flash controllers for Solid-Slate Drives (SSDs) . $SIMO is the global leader in supplying NAND flash controllers, which are components used in SSDs to provide faster write speeds smaller component size from traditional data-writing technology.


Competitors:


In terms of performance, Silicon Motion has preformed roughly in line with other competitors in the field, and even has outperformed some of them in the past 2 years. We have compared Silicon Motion with Seagate, JinkoSolar Holdings and Intel Corporation, noting that these are not perfect competitors as there are not many companies that develop NAND flash controllers. These competitors are used to value and compare $SIMO in the broader microchip/component industry.


20-Year Performance ($SIMO =>Black, $STX =>Purple, $JKS =>Orange, $INTC =>Blue)

2-Year Performance ($SIMO =>Black, $STX =>Purple, $JKS =>Orange, $INTC =>Blue)

Comparison of Financials:

In terms of financials, $SIMO financials metrics appear to be much stronger than many of their competitors.


Qualitative and Quantitative Catalysts:


1. Growing Demand in SSD and Storage.


The Global SSD market was valued at around $40B in 2021; SkyQuest Technology Consulting reports that the market value of SSDs in 2028 to be $104.44B at a CAGR of 14.7% every year before 2028. GrandView Research also suggests the same CAGR of 14.7% through 2025. This demand is driven by the expansion of the global server industry, the integration of data analytics in our daily lives, and the exploration of data intensive blockchain protocols.


2. No Debt


$SIMO has been debt free for the past 4 years, and their debt to equity ratio was 0.05% 5 years ago. In fact, their Asset-Liability ratio has historically been above 3.00 and its cash position of $408M alone can cover total liabilities of $314M.

3. Profit Margins


$SIMO's TTM Gross Margin is 50.30%, Operating Margin is 26.05% and Net Margin of 21.27%. Since 2012 each of these margins have not changed much, remaining within +/-5%. With these profit margins, Silico Motion has a dividend payout ratio of 32.30% and has a stable and increasing dividend payment for the past 10 years.


4. Merger Arbitrage Opportunity


MaxLinear intends to purchase Silicon Motion in a Cash-Stock Mix Deal Valued at $3.8 billion. $SIMO’s current market capitalization is 2.02 billion. For every 1 share held of $SIMO, shareholders will receive $93.54 and 0.388 shares of MaxLinear common stock. So as of November 2022, combining this deal will suggest that Silicon Motion is trading 40% below acquisition price. The spread for the cash portion of the deal is 21% alone. If this merger deal succeeds, shareholders of $SIMO can profit heavily. However, the regulatory challenges of an American company acquiring a Chinese company may prevent the deal from closing. The current stock price reflects that shareholders do not expect the deal to close given rising international tensions between the United States, Taiwan, and China.



Investment Thesis:

Silicon Motion Technology Corporation is a unique company in the semiconductor sector and will offer a strong and safe return on investment due to its good balance sheet, which has no debt, and it's stable profit margins. Growth in the SSD and server industry will also grow $SIMO in the long term and the impending merger could alone easily justify the implied upside for this company.


PT:$77.00 (Implied Upside of 25%)


Here's our valuation Model, composed in November 2022.


By Combing our DCF model and Comparative Analysis ROI, the combined implied ROI of 25.74% if the merger falls through.


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