2023-03-18 03:15:20 ET
Summary
- In the long run, the demand for Silicon Motion products is expected to increase and the company can make a huge profit in the following years.
- However, according to the current demand for PCs and Smartphones which affect the demand for SSD, eMMC, and UFS controllers negatively, SIMO’s 2023 revenues are limited.
- Also, despite improved liquidity ratios, the company’s ROR was impaired in 2022.
- The stock is a hold.
The key products of Silicon Motion Technology Corporation ( SIMO ) are SSD controllers and eMMC & UFS controllers. The long-term market outlook for SIMO’s products is strong in the following years, I expect the company’s sales to increase significantly. However, according to the current economic recession (high inflation rates, high interest rates, and the fear of financial crisis in the major economies), the demand for SSD controllers and eMMC & UFS controllers may decrease in the next few quarters as it decreased in the past a few months. However, we cannot ignore the fact that the reopening of China can support the demand for SIMO’s products. SIMO stock is a hold for now.
Quarterly results
In the fourth quarter of 2022, Silicon Motion experienced a 19% decrease in net sales, dropping to $200.8 million from $250 million in the previous quarter. Additionally, the company's net income fell by 45% from $42.5 million in Q3 2022 to $23.5 million in Q4 2022. However, despite these setbacks, Silicon Motion's sales for the full year of 2022 increased by 3%, which is a positive sign that they may outperform the PC and smartphone markets. The CEO attributed the decline in sales to weak demand caused by Covid-related lockdowns in China and falling NAND prices. Looking ahead to 2023, Silicon Motion expects their PCIe Gen 4 SSD controllers for OEMs to continue scaling up due to recent technology upgrades that enhance SSD efficiency. The CEO also expressed optimism about recovery from China's reopening and more stable NAND prices.
The market outlook
Figure 1 shows that in 2021, SSD controllers sales accounted for 55-60% of SIMO total sales, and this share decreased to 45-50% in 2022. Due to the decreased demand for PCs in 2022, Silicon Motion’s SSD controller sales decreased. However, it is worth mentioning that in 2022, PC shipments decreased by 16.2% YoY. “Our sales of SSD controllers decreased 5 to 10% for the year, however, this outcome is still much better than the performance of the PC market generally,” the CEO commented in the company’s 4Q 2022 earnings release. According to Gartner , PC shipment is expected to decrease by 6.8% in 2023 to reach 268 million units from 287 million units in 2022 (see Figure 2).
On the other hand, it is worth noting that SIMO’s sales to the OEM market, for SSDs used in the manufacture of PCs, grew 30% as the company’s extensive PCIe Gen 4 design-wins scaled. Due to the reopening of China, the company expects the sale of its PCIe Gen 4 SSD controllers to the OEM market scale further. Overall, I expect SIMO’s SSD controller sales to decrease again in 2023; however, not as much as in 2022. It is worth mentioning the long-term market outlook for PCs and SDDs is still strong.
The SDD market is expected to grow at a CAGR of 14.96% from 2023 to 2030 to reach $86 billion. On the other hand, in 2021, eMMC (Embedded MultiMediaCard) and UFS (Universal Flash Storage) controllers sales accounted for 30-35% of the company’s total sales and this share increased to 35-40% in 2022. “Our sales of eMMC+UFS controllers grew 15 to 20% for the year, significantly better than the sharp downturn in the smartphone market,” the CEO stated. However, the important thing to know is that due to the excess inventory at certain NAND flash customers, Silicon Motion’s 4Q 2022 EMMC+UFS sales decreased and the company expects this situation to continue for a few quarters.
Despite the current slowdown that can be changed with a more balanced NAND supply/demand, the market outlook for EMMC and UFS is strong. The demand for fast storage solutions in smartphones and laptops is increasing and it means more demand for UFS. According to Industry Research, the global market for UFS is estimated to grow at a CAGR of 15.7% from 2022 to 2028, reaching $7 billion. Another research shows that the Universal Flash Storage market size is estimated to grow at a CAGR of 18.64% from 2023 to 2030. Also, the market outlook for eMMC is strong as the adoption of embedded multimedia cards in the automotive and electronic devices industries is increasing fast. The eMMC market is estimated to grow at a CAGR of 3.5% from 2021 to 2027 to reach $13 billion.
Figure 1 – Silicon Motion sales mix, revenue, and EPS
Figure 2 – Worldwide shipment forecast by device type
SIMO performance outlook
In this comprehensive article, I analyzed Silicon Motion’s profitability and liquidity ratios to evaluate the company's ability to generate profits and utilize its assets effectively for investors. To gain valuable insights into the company's financial health, I examined margin and return ratios. Additionally, I compared the ratios to previous years to provide more meaningful results.
Margin ratios are crucial in assessing a company's ability to convert revenue into profits through various means. Overall, it is evident that Silicon Motion had slightly weaker gross profit, EBITDA, and net profit margins in 2022 than at the end of 2021. Specifically, the company's total revenue increased to $946 million in 2022 from $922 million at the end of 2021. However, lower revenue combined with lower net profit and EBITDA resulted in worsen margin ratios at the end of 2022.
SIMO’s gross profit margin was constant in 2022 and stayed at 0.5 alike the end of 2021. Additionally, the company's EBITDA margin rose by 50% to 0.27 in 2021 compared with the amount of 0.18 in 2018, but decreased back to 0.24 at the end of 2022. Furthermore, Silicon Motion’s net profit margin, which provides a final assessment of the company's profitability after all expenses have been accounted for, plumped by 18% and reached a value of 0.18 in 2022 versus the last year’s amount of 0.22. Notwithstanding decreasing results in 2022 versus 2021, the company still indicated higher results compared with recent years (See Figure 3).
Figure 3 – SIMO’s margin ratios
I analyzed SIMO’s return on equity and return on assets ratios to assess the company's ability to generate returns for its shareholders. The ROA ratio measures the profit a company generates for each dollar of its assets. Although Silicon Motion’s ROA ratio decreased by 265 bps to 17.94 % in 2022 compared to 20.59% at the end of 2021, it is still significantly higher than its performance in further years. Furthermore, the company's return on equity was lower at 23.55% in 2022 compared to 30.41% in 2021. The ROE ratio is crucial as it calculates the rate of return on capital invested in the business by shareholders. It was almost because Silicon Motion’s net income decreased slightly from $200 million in 2021 to $172.5 million in 2022 (see Figure 4).
Figure 4 – SIMO’s return ratios
In conclusion, I have evaluated Silicon Motion’s performance outlook by examining its liquidity through the cash and current ratios. Despite underwhelming return results, the liquidity analysis of SIMO paints a more positive picture. The company's current ratio saw a significant increase from 2.91 in 2021 to 4.28 at the end of 2022 due to a considerable decline in assets in liabilities. On the other hand, SIMO’s cash ratio decreased slightly from 1.28 in 2021 to 1.26 in 2022. In summary, Silicon Motion’s liquidity position shows a kind of solid condition for 2023 (see to Figure 5).
Figure 5 – SIMO’s liquidity ratios
Summary
The long-term market outlook for Silicon Motion’s products is strong. However, due to the economic recession, the company’s growth is expected to be limited in the following quarters. Notwithstanding higher revenue, SIMO’s lower net profit and EBITDA led to lower margin ratios in 2022 compared with 2021. Also, the company’s ROA and ROE ratios declined by 265 bps and 686 bps to 17.94% and 23.55% in 2022, respectively. However, SIMO’s liquidity ratios across current and cash ratios stayed in good condition. The stock is a hold.
For further details see:
Silicon Motion: Short-Term Vs. Long-Term Market Outlook