Better Ability To Cope With Fluctuations Of NAND Supplies;
Raise Price Target To $9.50
We reiterate our Buy rating and raise our price target to $9.50 from $8.50, despite
recent weakness in the semiconductors space. We like SIMO at the current level
because worldwide demand for NAND flash is set to grow significantly in the next
few years due to higher content per box and increasing popularity of smartphones
and tablet PCs, and SIMO is well positioned to benefit from this trend with its
technology lead in NAND flash controllers. We do not believe a shortage of NAND
(if there is one) in 2Q11 and 3Q11 will throw SIMO off the trajectory of revenue
and EPS growth in 2011 and 2012, as more exposure to large OEM customers has
improved SIMO's ability to cope with fluctuations of NAND supplies. We see
reward outweighing risk at the current level, given SIMO’s opportunities in TLC
and 2x NAND flash controllers, CDMA EVDO transceivers, and eMMC
(embedded multimedia card).
• SIMO's ability to cope with fluctuations in NAND supply appears to
be better this time. Many investors anticipate that NAND flash will be in
a shortage in 2Q11 and 3Q11, as no meaningful additional production
capacities will come online at major NAND flash vendors until 4Q11, and
Apple's (AAPL, Not Rated) iPad 2 and iPhone 5 and other tablet PC
vendors' products will likely soak up a significant portion of the NAND
output. Conventional wisdom thinks that SIMO's operating performance is
negatively correlated with NAND availability in the open market; we note
that large OEMs now account for a much bigger proportion of SIMO's
mobile storage revenue than a few quarters ago, and SIMO's ability to
cope with the fluctuations in NAND supply has improved significantly, as
large OEMs typically do not reply on open market purchases and are
usually in better positions to secure NAND supplies than smaller players
during a shortage. In our opinion, if there is a shortage of NAND in 2Q11
and 3Q11, NAND flash controller makers that have strong ties to large
OEMs and NAND flash vendors (such as SIMO, Phison [8299.tw, Not
Rated], and Skymedi [3555.tw, Not Rated]) will likely gain market shares
at the expenses of their smaller competitors.
• Model changes. We increase our 2011 revenue and pro-forma (excluding
share-based compensation) EPS estimates to $171mln/$0.73 (consensus
$165mln/$0.66) from $165mln/$0.65. We also increase our 2012 revenue
and EPS estimates to $193mln/$0.93 (consensus $184mln/$0.81) from
$190mln/$0.89.
• Valuation. Our new $9.50 price target is 13x our new 2011 pro-forma
(excluding share-based compensation) EPS estimate of $0.73. Our old
$8.50 price target was based on 13x our old 2010 pro-forma EPS estimate
of $0.65. |
