Silicon Motion Sidesteps Memory Shortages

The next time you buy a gadget built around flash memory, like an Apple (Nasdaq: AAPL  ) iPod or a digital camera from Sony (NYSE: SNE  ) , you should send an investor-minded brain wave to the memory controller industry. Investing in the tiny chips that make memory modules tick can be better than buying the memory makers themselves.

The latest support for this moneymaking angle comes from Silicon Motion (Nasdaq: SIMO  ) and its third-quarter report. The company saw 44% year-over-year sales growth on 57% more units, despite operational challenges.

Management called this quarter "a difficult period" for the company and the memory controller industry as a whole. NAND flash memory shortages at the start of the quarter have loosened a bit now, but had a real effect on sales and profits over the past three months.

In the last report, CEO Wallace Kou highlighted these issues. He said that they were caused by "speculative activities" in the memory market and would go away soon enough. He now thinks the speculation is over and Silicon Motion is poised for a nice comeback.

The continued growing demand for flash memory is great news for memory-chip makers like Micron (NYSE: MU  ) and Spansion (Nasdaq: SPSN  ) , controller designers like Silicon Motion, and producers like Toshiba and SanDisk (Nasdaq: SNDK  ) , which make the whole package. And Kou doesn't see an end to that demand anytime soon.

"Despite fears that U.S. macro economic issues may affect consumer spending, current indications suggest that handsets and other electronic devices that use our products continue to sell well," he said. And while memory cards constantly have more and more memory chips crammed onto them for lower and lower prices per megabyte, each card still needs exactly one memory controller. That means that card makers can't demand the same volume discounts on controllers that they do on the actual memory silicon.

Thanks to these positive industry trends, the company kicked up its guidance a few notches and was rewarded with an 18% share-price spike after the earnings call. The stock has outperformed every stock I've mentioned here except for Apple over the past three, six, and 12 months, and it looks like it can keep the beatings going for quite a while yet.

Further Foolishness:

• Foolish Forecast: Silicon Poetry in Motion
• The Top-Rated Asian Stocks
• Turning $1,000 Into $276 Trillion