3 Factors Prompt Susquehanna Downgrade Of Silicon Motion Technology

Silicon Motion Technology Corp. (ADR) (NASDAQ: SIMO), which develops flash controller ICs for solid-storage devices and specialty RF ICs for mobile devices, could be hit by a triple whammy.

The Analyst

Susquehanna’s Mehdi Hosseini downgraded Silicon Motion from Positive to Neutral and reduced his price target from $60 to $48.

The Thesis

Though not subscribing to the idea that Silicon Motion’s largest customer is going to develop components in-house, Hosseini said NAND bit growth estimate is capped at 40 percent. Hosseini expects NAND manufacturers to continue to struggle with the 3D NAND migration.

This 40 percent growth, according to the analyst, is premised on improving 64L yields and the use of QLC with 64L 3D NAND. However, the analyst is of the view that this is inadequate to drive upside.

Overall revenues that are expected to be capped at $600 million and a lack of meaningful P&L leverage will limit earnings to $4, Hosseini said.

The 25 percent run up and a lack of visibility on the company’s long-term revenue growth drivers and operating leverage were the main premises behind the downgrade, Susquehanna said.

While increasing December quarter estimates in-line with the company’s preliminary results released Jan. 5, Hosseini lowered his 2018 estimates for the company. The analyst also introduced 2019 estimates, which are below his previous 2018 estimates.

Price Action

Shares of Silicon Motion are up about 7 percent over the past year.

Reacting to the downgrade, the stock was trading down 9.6 percent to $45.83.

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