This Stock Has Cornered a Niche

Small businesses need to find a niche. Once you know what you're really good at, you can dominate much larger competitors inside your comfort zone. For example, Coca-Cola and PepsiCo have tried to gain a foothold in the red-hot energy drink market for years, but there's not much room for also-rans like AMP Energy and Full Throttle in a sector that 's utterly dominated by Red Bull and Hansen Natural's Monster Energy brand. Expertise in a small niche often trumps spending power and scale.

That's the case with small-cap semiconductor wrangler Silicon Motion Technology (Nasdaq: SIMO  ) . The company won't challenge Qualcomm (Nasdaq: QCOM  ) or Analog Devices (NYSE: ADI  ) in about 99% of the markets those big boys serve. But when Samsung or Micron Technology (NYSE: MU  ) need a memory controller for their flash-based storage products, they go to Silicon Motion because this tiny company is very good at making those particular chips.

Silicon Motion is living the high life these days thanks to booming business in smartphones and solid-state drives -- both of which use plenty of flash memory controllers. Don't let today's trading weakness fool you, because the company's market muscle has been priced into the stock for a while: A 83% return over six months is nothing to sneeze at. Besides, the market price rushed near last night's closing bell as investors clearly expected good news from Silicon Motion.

And they got it. Second-quarter sales gained 60% year over year while the year-ago period's $0.22 loss per American Depositary Share turned into net profits of $0.07 per ADS. Over that time span, shipments of specialized memory controllers for SSDs more than quadrupled to become more than 10% of total revenues. Advanced controllers that can control 3 bits per memory cell instead of the traditional 2-bit model doubled since last quarter and now stand for more than 30% of controller shipments.

Samsung is Silicon Motion's largest customer, which makes sense because it's the largest flash memory producer in the world. It's also an impressive achievement because Samsung is no slouch at making its own chips. Silicon Motion beats out Samsung's internal development here. I wouldn't be surprised if a larger chip designer bought out Silicon Motion just to get its hands on that tasty flash controller expertise.

Just like Red Bull and Hansen, Silicon Motion has found its niche. That's how you make a great investment from a small start.

What's your favorite niche ninja? Silicon Motion, Hansen, or somebody else entirely? List it in the comments box below.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Coca-Cola is a Motley Fool Inside Value pick. Coca-Cola and Pepsi are Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on Pepsi. The Fool owns shares of Coca-Cola. Hansen Natural is a Rule Breakers recommendation because it points at other big boys and laughs all the way to the bank. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and Foolish disclosure policy is updating a classic tune for modern times. Look for Shave and a Haircut in a music store near you.


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