The chip industry is currently dealing with one of the worst downturns in PC and smartphone sales in recent history. After several years of pandemic-fueled consumer-electronics purchasing (due to work-from-home orders), households are now paring back spending on computing devices.
This is happening just as the supply of some chips and components is making a comeback from early pandemic lockdowns. Companies like Micron Technology (MU +5.08%) have been clobbered as a result (its stock is down more than 40% over the last 12 months) as device manufacturers hit the brakes on memory chip orders to work through existing inventory.
But one memory-chip market company could fare better than Micron in 2023: Silicon Motion Technology (SIMO +2.62%). The company's sales have been holding much steadier during the current downturn, and it pays a healthy dividend for investors in search of income. Here's what you need to know about this small company.
Don't get excited about an acquisition just yet
Perhaps Silicon Motion hit your radar because of news of it being acquired last year. Fellow chip designer MaxLinear (MXL +2.36%) announced in May 2022 its intention to purchase Silicon Motion for a combination of cash and stock -- with the offer currently worth about $108 per share of Silicon Motion (0.388 shares of MaxLinear plus $93.54 cash).
Silicon Motion stock currently trades for a massive discount to that offer at just over $65 per share as of this writing. With pressure on the memory chip industry in focus, the market has punished Silicon Motion as if a buyout offer wasn't even a factor to consider. What gives?
NASDAQ: SIMO
Key Data Points
Investors have doubts that Chinese regulators will sign off on the merger, especially in the wake of new U.S. restrictions on chip exports to China. Silicon Motion is based in Taiwan, and MaxLinear in California, so there's reason to believe China will veto the tie-up to prevent Silicon Motion (which supplies parts to Chinese data-center operators) from being uprooted and moved back to the U.S.
Perhaps I'm wrong and MaxLinear will be given the go-ahead, providing an easy profit for Silicon Motion shareholders, but I wouldn't buy the stock for that reason alone. Still, there are other reasons Silicon Motion has appeal.
It is the leader in providing NAND flash controllers, a type of processor that manages data storage devices for PCs, smartphones, industrial equipment, and data centers. Memory chips are a commodity product when building a computing system, but Silicon Motion's controllers aren't quite as susceptible to big swings in supply and demand.
A side-by-side comparison with Micron's revenue in recent years bears this out, showing a much more stable path of sales and net income growth for Silicon Motion.
Data by YCharts. TTM = trailing 12 months.
A downturn is here, but this chip designer could bounce back quickly
Granted, expect Silicon Motion to also be impacted by the current downturn in the chip industry. Third-quarter 2022 revenue was down just 1% year over year. During its last quarterly update in November, management said it was experiencing a pullback in orders from some of its customers, though next-gen adoption of advanced NAND memory was driving demand for the company's newer controllers. The average Wall Street analyst covering Silicon Motion is anticipating slight declines in sales for the next few quarters.
However, it could recover far more quickly than Micron, which was anticipating NAND memory to once again outperform the memory-chip market overall in 2023, with demand expected to accelerate in the second half of 2023. That bodes well for Silicon Motion's NAND controller business.
What isn't expected, though, is an implosion of sales and profit margins in the coming months like what Micron is experiencing. It just reported a nearly 50% year-over-year drop in sales, and steep losses are expected in the current quarter, which will end in February.
Meanwhile, Silicon Motion is still highly profitable. Operating profit margin was a healthy 22% in the third quarter of 2022, and free cash flow was $34 million (or 13.5% of revenue). The balance sheet was also in good shape with $199 million in cash and no debt, giving the company breathing room should its financials sour in the coming quarters.
Along the way, Silicon Motion shareholders are also treated to a dividend that currently yields 3.1%. Shares trade for about 10.5 times trailing-12-month earnings per share, a metric that could deteriorate if sales and profits fall. However, with NAND memory a long-term growth market and Silicon Motion a proven profitable business in this niche, the stock could be a fantastic value right now.
Micron currently expects improvement in the memory chip market by the middle of 2023, but things could get rough between now and then. In the meantime, Silicon Motion could be a far more stable business to invest in, with possible significant upside potential should its NAND business bounce back more quickly than memory chips overall.
An acquisition by MaxLinear later in 2023 would be an added bonus -- should Chinese regulators surprise by signing off on the deal. If you like Micron stock, Silicon Motion should definitely be on your radar, too.
