This "Small Cap to Rule Them All" Pick Is Still a Chip Off the Old Block

It's been just slightly more than a year since I introduced my list of 10 small-cap companies to rule them all. Integrated Silicon Solution (Nasdaq: ISSI), a fabless semiconductor company, was my third selection in the series, and today I thought it would be worthwhile to see how it's performed since then and what you can expect from the company going forward.

Source: Yahoo! Finance.

Where it's been
It wasn't a huge outperformance given the great year that the market indexes have had, but I will gladly accept that Integrated Silicon has moved higher by 22%.

The key driver for the company's growth continues to be its DRAM products, which logged a record $44.3 million in sales in the fourth quarter. Integrated Silicon makes a wide variety of products, but the main driver of growth (pun fully intended) has been its automotive division, which noted a 44% pop in revenue during the quarter.

The other key development of 2011 was its full integration of Si En Integration Holdings. Si En and its analog and mixed-signal circuitry products are expected to bring better margins to Integrated Silicon's highly cyclical business.

If there was one thorn in shareholders sides' in 2011, it was that China is transitioning from older handsets to smartphones, causing a slowdown in the company's analog line, which caters to lesser expensive phones. Luckily for Integrated Silicon, the transition will take many years and give the company a chance to adjust its product line.

Where it's going
As with all specialty memory semiconductor manufacturers, the most important aspects of their business are keeping expenses under control and having ample cash in the bank to weather cyclical troughs. Integrated Silicon seems to have both of these more or less under control.

In the fourth quarter, its administration expenses rose modestly by 1.4%, while research and development costs associated with its communications division ticked up by 12.6%. In short, the company isn't fruitlessly wasting its cash. Integrated Silicon ended the year with $102 million in the bank with no debt, or, to put it another way, its cash makes up about a third of its value. Ample cash easily allows Integrated Silicon to navigate any downturn in the economy.

The real advantage to its future growth lies in its differentiation in memory specialization. As I've mentioned, the company makes products for the automotive, telecom, industrial/medical, and digital consumer market. That places it at a comparative advantage to SanDisk (Nasdaq: SNDK), whose NAND memory is heavily reliant on commodity input prices and consumer buying habits to drive its growth. Similarly, Micron Technology (NYSE: MU) will find itself at a disadvantage, since its DRAM caters primarily to PCs and tablets, and, like SanDisk, its NAND line is easily susceptible to pricing weakness.

Foolish roundup
Integrated Silicon Solution may be small, but it holds down a solid niche in the specialty memory sector. With a lot of cash on its books and a recent history of being strongly profitable, there really is no reason that this company shouldn't be on your radar. Despite the rise since last year, it's my contention that it could even be cheaper now than it was back then. I'm maintaining my CAPScall of outperform on the Integrated Silicon Solution and am looking forward to what I anticipate will be another good year.

What's your take on Integrated Silicon Solution: Is this a chip off the old block, or yesterday's news? Tell me and your fellow Fools about it in the comments section below.

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