Tech has been one of the hottest sectors for many years, and exchange-traded funds (ETFs) such as the Vanguard Information Technology Index Fund ETF make it easy to get broad exposure to this sector. However, beneath all of the ETFs and market noise are a bunch of small-tech stocks that have quietly crushed the S&P 500.
Silicon Motion Technology (SIMO +4.48%) is one of those stocks. It's up by 150% year to date as more investors recognize its role in the AI boom, and Wall Street analysts believe it has more room to run.
Image source: Getty Images
Understanding Silicon Motion Technology's role in memory storage
AI chips have been hot commodities for years and are a well-known trade. However, one of the less recognized aspects of this boom is that each AI processor platform has a bunch of smaller chips inside.
Memory chips are one of the key components of AI chips, and some investors capitalized on that knowledge by loading up on Micron and SanDisk.
NASDAQ: SIMO
Key Data Points
Silicon Motion Technology doesn't create memory chips, but it designs the controller chips that go inside memory chips. The firm's recently filed Form 20-F highlighted Micron as one of its largest customers. Micron has made up more than 10% of Silicon Motion Technology's revenue for multiple years.
Just as AI chipmakers such as Nvidia turn to firms like Micron, memory chipmakers like Micron must turn to NAND controller providers like Silicon Motion Technology for vital components.
Micron almost tripled its revenue year over year in the second quarter of its fiscal 2026, and its third-quarter guidance is for revenue of $33.5 billion at the midpoint, which would be a 40% sequential improvement. That growth should directly translate into more sales for Silicon Motion Technology.
Revenue is starting to surge
Silicon Motion Technology's Q1 results set Wall Street ablaze as analysts rushed to raise their price targets on the stock. JPMorgan Chase raised its price target from $145 to $260 after reviewing the report, and the highest price target is currently $275.
In the quarter, revenue jumped by 105% year over year to $342.8 million, far exceeding the $299.6 million analysts expected. In his comments, CEO Wallace Kou heralded an "exceptional start" to 2026 that will set the stage for a "defining year."
Guidance calls for another blockbuster quarter in Q2. The outlook calls for $402 million in revenue at the midpoint, which would be 17.5% sequential growth.
Net income more than tripled year over year, resulting in a 19.5% net profit margin. Rising profit margins, combined with long-term AI tailwinds, give Silicon Motion Technology a good opportunity to extend its gains. Wall Street is on board, and the firm's low 0.70 PEG ratio suggests that the rally has more room to run.
Investors must monitor the AI trade
One caveat about Silicon Motion Technology is that it operates in a cyclical industry with lumpy revenue. For instance, the company has posted captivating results in recent quarters, but its top line has only grown at a 10.4% compound annualized rate over the past five years. And over the past three years, its revenue has actually, on average, contracted.
That revenue history doesn't necessarily make Silicon Motion Technology a bad stock. The revenue growth that it's experiencing stems from a healthy AI industry that is projected to maintain a 30.6% compound annual growth rate from now until 2033, according to Grand View Research.
Big tech companies continue to invest substantial capital into this opportunity. They aren't afraid to spend money, and many companies operating in areas of the AI trend where there are supply bottlenecks have benefited. This is a multiyear cycle. The longer AI remains hot, the more Silicon Motion Technology stock can reward patient shareholders.
