Hot Flashes From Silicon Motion

Spice up your Valentine's Day with even more smokin' hot investments.

When was the last time you saw a tech stock trade for 10.2 times current-year earnings? Can't remember? I'm not surprised. Here's a look at the 2008 multiples for some of the biggest names in tech.

Company

2008 P/E

Apple

23.8

Google

25.7

Intel (NASDAQ:INTC)

14.9

Microsoft

14.5

Texas Instruments (NYSE:TXN)

14.4

Source: Capital IQ, a division of Standard & Poor's.

I'm a big believer in most of these businesses. Apple, especially. Yet I'll stack my super-cheap tech wonder, Taiwan's Silicon Motion (Nasdaq: SIMO  ) , up against any of them. Here's why.

Silicon Motion is a supplier of controllers for flash memory. What that means is that, instead of buying and selling super-cheap memory chips the way Micron (NYSE: MU  ) , STMicroelectronics (Nasdaq: STM  ) , and Samsung do, my stock-market heartthrob sells electronics that help memory chips process digital commands from the devices they serve. Common examples would be storing a picture or retrieving a song.

There are, of course, advantages and disadvantages to participating in this market. The key advantage is volume. Millions of devices require flash memory, and most devices that require flash require a controller. Digital cameras, for example.

The key disadvantage is competition. Texas Instruments and Freescale Semiconductor are two of many chipmakers to build flash-memory controllers directly into chips for more complex equipment, such as PCs. Were this practice to become common for smaller devices, Silicon Motion would pay a steep price.

So far, that hasn't occurred, and I don't believe it will. Not soon, anyway. Samsung, Micron, and their peers update their flash offerings too often for those who make the brains of these devices to keep pace.

And remember: Silicon Motion is priced low enough to easily compensate for any potential risk.

Do the math with me. Capital IQ says that Silicon Motion has never traded for less than 12.2 times trailing earnings in its history. Assuming that we once again reach that lowball multiple in December 2008, and that Silicon Motion earns the $1.52 per share in net income that analysts expect, then its shares would be worth $18.50 each at that time. That's a 16% premium from yesterday's close.

But that could be a conservative estimate. Silicon Motion has boosted earnings by 69.8% annually over the past three years and, according to Capital IQ, is expected to go on improving its bottom line by 30% a year over the next five. Stocks growing that quickly rarely trade for 12 times earnings.

And when they do -- like, say, now -- the bargain doesn't last long. Pucker up.

Get your clicks with related Foolishness:


Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 577921, ~/Articles/ArticleHandler.aspx, 11/28/2014 8:45:57 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement