Well, for whoever is paying attention to this board, I'm going to make the current pitch for SIMO. There's a SIMO board on SI, but I'm the only one who chats over there. SIMO has fallen from a recent peak of about $29 down to about the $21 level in the past month. I don't see any good reasons for the decline, SIMO's growth outlook for 2015 looks like it could be really amazing.
What does SIMO do? 90% of their business is controllers for NAND flash storage. They sell these to the NAND makers (Sandisk, Samsung, Sk Hynix, etc.) or to module makers that buy NAND from the NAND makers, buy controllers from companies like SIMO, and then build some storage device.
Removable storage controllers - for USB flash drives and removable storage cards - are the "legacy products" for SIMO. This area is the cash cow, has below corporate average gross margins (due to high competition among controller providers) and is in slow decline, sales here are expected to fall by about 10% per year. This is probably 40% of 2014 sales. SIMO has about a 40% market share in this area.
Embedded storage controllers - for cell phones, tablets and solid state drives - are the new growth products. This area is growing rapidly, and has above corporate average gross margins. This segment is probably 55% of SIMO's 2014 sales. The main product lines are
1. eMMC controllers for NAND storage in cell phones and tablets. SK Hynix is SIMO's main customer. SIMO has a 2nd eMMC customer which began buying in Q2 2014, and is expected to significantly ramp buying in Q1 2015. The average selling price is 50 cents a piece. SIMO's eMMC sales grew over 100% in 2013, is expected to grow above 50% in 2014, and it expected to grow at or above market rates in 2015.
2. Solid State Drive (SSD) controllers for NAND storage in PCs. SIMO began production of an entry level SATA-3 SSD in summer 2014, and now has 3 of the 5 NAND makers as OEM customers for their product. 2 of these 3 OEMs will begin purchasing the product (~$6 ASP!) in Q1 2015, the 3rd NAND OEM will begin purchasing in H2 2015. There are only 5 NAND makers on the planet, having 3 of the 5 buy from SIMO is huge. SIMO's has a second SATA-3 SSD based on TLC flash in sampling now, and plans to release a PCIe gen 2 and gen 3 SSD in 2015. If all are as successful as the first SATA-3 product appears to be, SIMO will be a major vendor of SSD controllers in 2016. SIMO expects ~$15 in SSD sales in 2014, and expects this number to grow 3x to 4x in 2015. Gross margins are above the corporate average.
3. Enterprise SSD modules. This is a complete package - NAND mempory + controller - that SIMO sells to the enterprise market. It can go in point of sales devices, printers, anything that needs internal memory. SIMO just announced a product targetted at automobiles for their internal gaming or video systems. This area is about $20m in 2013 sales and is expected to grow about 20% per year, it doesn't get much discussion compared to the other two areas.
SIMO's last product area is cell phone transceivers. They have about 5%-10% of sales from transceivers. The only interesting thing about this part of their business is they sell LTE transceivers to Samsung which are paired with Samsung's internal LTE baseband. This product did poorly in 2013 and is expected to deliver $12m in sales in 2014. Visibility is very low, but if Samsung steps up it's usage of it's own internal LTE baseband, SIMO's LTE transceiver sales could do incredibly well since that market space is so large. If it doesn't do well, it's only $12m in sales that may be in jeopardy, so it's sort of like a call option with lots of potential upside, and not much to lose if it all goes to hell.
Recent results:
SIMO did great when smartphones appeared as many of them used attached removable cards for additional storage, and SIMO was huge in the card controller market. When embedded storage replaced cards, SIMO's revenues stumbled as they attempted to gain share in the eMMC market. Now eMMC sales are much larger than removable cards sales, so SIMO has returned to revenue growth. SIMO grew 32% sequentially in q2 2014 and grew 24% sequentially in Q3 2014, and both of those quarters were up more than 50% year over year. Q4 2014 is expected to be about $82m in sales, up more than 50% from Q4 2013.
Gross margins are increasing as eMMC and SSD grow and USB drives and removable cards shrink as a percent of revenues.
And look what you have to look forward to.
A) In Q1 2015 the second new eMMC customer is expected to meaningfully increase it's purchases.
B) In Q1 2015 the two NAND makers are expected to begin purchasing the SATA-3 SSD controller (~$6 ASP)
C) In Q1 2015 a major storage vendor is expected to begin purchasing the SATA-3 SSD controller
D) For full year 2015, USB card controllers and removable card controllers will decline a bit, eMMC should grow better than the market since SIMO is adding a second major NAND OEM as a customer, SSDs should grow 3x to 4x 2014 levels, and could easily be a lot more than that since the buyers are the huge NAND OEMs, gross margins should go up since the eMMC and SSD products have above corporate average gross margins.
Other bits of interest about SIMO
- They have almost $5 per share cash, and no debt
- They pay 60 cents per year (15 cents per quarter) in dividends
- They claim to be the only meaningful merchant eMMC supplier (the competition is the internal controller groups inside the NAND makers).
- There are only 3 SSD merchant controller makers (Marvell, SIMO, Phison)
- Low competition in eMMC and SSDs means high gross margins are sustainable - this is really, really good.
I don't know the revenue growth number for 2015, but it's almost definitely going up. Embedded storage is hot, SSDs are going to grow for the next 3-6 years, eMMC is probably going to continue to grow at a raesonable pace. What do you pay for this growth? SIMO is forecast to make about $2.00 EPS in 2015, so at $21 with $5 cash you are paying 8x 2015 EPS. It's HPQ level cheap, and it is exposed to very very high growth markets (eMMC and SSDs).
There aren't a lot of pure plays on the transition from disk drives to SSDs. SIMO is about the best way to invest in that trend, which is with us for the next few years, and is HUGE. All the SSD related stocks have other segments that are really large and hurt by the transition (MRVL). Can you imagine the multiple expansion (from 8x next year's earnings to ??x next year) when SIMO's SSD controller sales grow 3x to 4x in 2015, and they then have a full line up of TLC and MLC SATA-3 and PCIe SSD controllers?
So I can't give you a good reason why it has fallen down to $21, but I think it's a buying opportunity. 2014 has been a great year for SIMO (revenues up about 30% over 2013) and the potential for 2015 looks really good. The legacy products are small enough now that their decline is no longer a major drag on total company growth, the LTE transceiver business with Samsung may take off again, eMMC should grow due to adding a second NAND OEM to SK Hynix (their big eMMC customer) and SSDs have 3 of the 5 global NAND makers as OEM customers.
The growth areas (eMMC, SSDs) have minimal merchant competition so pricing should remain stable. High growth and stable prices = shares go up. Q: Why doesn't SIMO get a 20x multiple rather than 8x? A: Hopefully soon it will get a reasonable growth stock multiple.
If anyone has any comments or questions, you can ask here or on the SIMO board. Id love to hear why you don't own SIMO, because from my perspective it seems perhaps the best small cap growth stock with low valuation out there. |
