Why isn't SIMO using cash and even debt to buy back shares?
I can't explain their managerial decisions on capital allocation. They had said the dividend is the main way they return cash to shareholders, and they have historically returned 50% of free cash in the form of dividends. They have in the past had stock repurchase plans, but they've generally done that when they think the shares are extremely undervalued for no good reason.
If 2007/8 (way back when!!) they were going gangbusters as their controllers exploded in the new market of USB sticks (!!). Then for reasons I'm not sure why there was a pause in their sales, and the stock plunged from $30 or so to $18. They initiated a $40m (large at the time) share buyback, and spent (I think) the whole $40m buying stock. :In the summer of 2008 the shares were down to $14, so they announced another $20m share buyback. They didn't execute that one entirely, and then the financial crisis of 2008 hit, and the shares went down to $1.80 or so in March 2009. Perhaps that history (spending over $40m buying their own shares for around $15 each, just before their shares went to $1.80 each) turned them off to share repurchases? I don't really know.
I think it may be Taiwanese corporate culture to ignore the share price and focus on the business. Again, not really sure.
We'll see. If their sales are going to grow 30% in 2022, then we gotta see how the share price reacts. But SIMO seems to have a negative investor sentiment despite better fundamental performance recently than all but the best hypergrowth semiconductor stocks. To be fair, they had flattish sales for five years up until 2020, so maybe investors don't know if the five years of flat sales is normal, or the recent history of hyper growth sales is the new normal, or what. The longer the hype growth (or even normal semi growth at this point) continues, the more I would expect the investment world to come around. But it might take years and years of 15% sales growth to get SIMO up to a modest (for semis) 20x PE.
It is possible that one of their largest customers (MU) can develop their own version of a UFS (cell phone) memory controller, and use their internal version rather than buy it from SIMO. That would cause 20% of SIMO's sales (the UFS product line) to head toward zero in a year or two. To date there is no indication that MU is going to quit SIMO UFS and go internal, indications are in fact the opposite, but that possibility exists and dampens the valuation somewhat I'm sure. If investors gain confidence that MU will not go internal with UFS controllers.....ever, then perhaps SIMO's PE multiple would expand.
I'm hoping SIMO's gross margins increase next year, and stay higher. That also may justify a PE increase as higher gross margins implies (one would guess) more valuable and more difficult to replace technology.
So although SIMO's valuation today stinks, if whatever is causing the valuation discount GOES AWAY, then that could be a great time to own SIMO will revenue and EPS growth, and PE multiple expansion. Either that, or an acquisition by a larger diversified semiconductor company is my desired exit strategy.
Why the acquisition does not occur now is beyond me. Maybe Taiwan's laws prohibit it. I would think lots of large semi companies would want an accretive acquisition of the merchant market global leader in a modest growth segment. Semiconductor design skills is relatively scarce, why SIMO gets a 10x forward PE in an efficient market escapes me. |
