Foolish Forecast: Silicon Poetry in Motion

Tonight, there's a quarterly update from globetrotting semiconductor designer Silicon Motion (Nasdaq: SIMO  ) . Its share price has gained more than 30% in value over the last year, and it's easy to wax poetic about results like that. But what's next? Let's have a look.

What Fools say:
Here's how Silicon Motion's CAPS scoring rates against some of its peers and competitors:

Market Cap (millions)

Trailing P/E Ratio

CAPS Rating

Silicon Motion Technology

$695.0

18.4

*****

NVIDIA  (NASDAQ:NVDA)

$18,800.0

35.2

****

Sigmatel (NASDAQ:SGTL)

$116.1

NM

*

QUALCOMM (NASDAQ:QCOM)

$69,520.0

25.3

***

Actions Semiconductor (NASDAQ:ACTS)

$439.2

6.9

****

Data taken from Motley Fool CAPS on 10/30/2007.

That's five juicy stars, unmatched by any of these top competitors. One All-Star CAPS player thinks the company will beat estimates this time because management set the bar low: "Management guided conservatively last time due to tight NAND supply which appears to have loosened now."

What management says:
Last quarter, CEO Wallace Kou said that his company was growing in every market segment it touched, and was "balancing strong growth with healthy profitability." Moreover, he saw new markets opening up as flash memory spreads to devices that would traditionally rely on hard drive storage or none at all, such as low-cost notebooks or consumer electronics.

What management does:
This is still a young and growing business, as you can see in the accelerating revenue growth. Earnings growth is settling down into a sustainable long-term range, after more than doubling in 2004 and 2005. Thanks to the fabless, asset-light manufacturing model, margins start out strong at the top of the income sheet and remain fat all the way through operations. And you'll hear in a minute why net income is so close to operating income.

Margins

3/2006

6/2006

9/2006

12/2006

3/2007

6/2007

Gross

51.9%

53.2%

53.5%

53.4%

53.5%

53.2%

Operating

25.9%

26.7%

26.8%

25.6%

26.6%

25.8%

Net

26.2%

27.3%

27.2%

27.4%

28.0%

25.3%

 Growth (YOY) 

3/2006

6/2006

9/2006

12/2006

3/2007

6/2007

Revenue

18.9%

17.2%

22.7%

28.8%

48.5%

68.0%

Earnings

130.7%

85.3%

64.7%

40.7%

58.7%

55.8%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Silicon Motion takes any advantage it can get. The company is headquartered in Hsinchu, Taiwan, in a science hotbed the Taiwanese government is positioning as the "Green Silicon Island." There's plenty of technical talent in that neighborhood, and it's right next door to one of Silicon Motion's contract manufacturers, United Microelectronics (NYSE: UMC  ) .

The stock isn't listed on the Taiwanese exchange and then placed on the American market through the magic of ADRs, the way most foreign companies do it. Instead, it's listed directly on the NASDAQ exchange to remove one level of abstraction, confusion, and barriers to liquidity.

And finally, the company isn't incorporated in Taiwan, nor in the U.S., but in the Cayman Islands tax haven. The income tax provision was just a little more than $600,000 last year, out of $29.7 million in pre-tax income.

The company holds some attractive ground in the semiconductor field as the market leader in flash memory controllers, with a stake in digital media decoding and mobile display chips. A stated commitment to open standards makes it easy for its customers' development teams to build products around these chips.

Silicon Motion went public just two years ago, but there's complete financial data for its pre-IPO operations stretching back to 2002. There should still be plenty of growth ahead of this small-fry, but you may want to wait for the notoriously volatile share price to drop again before buying in. It's not a matter of if the drop will come -- just when and how far?


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