Mordechai Yavneh of Focus Capital Management presented his investment thesis on Silicon Motion Technology (US: SIMO) at Best Ideas 2022.

Thesis summary:

Silicon Motion is the leading merchant supplier of NAND flash controllers. It is a highly profitable, fast-growing company, with a fortress balance sheet and a P/E of 17x (ex-cash P/E of under 15x), while growing share in a growing market.

In 2021 and continuing in 2022, the business is experiencing a permanent step-up in revenue and margins. In 2021, revenue jumped ~70% and operating margin expanded from 20% to 27%. In 2022, Mordechai expects revenue growth of at least 30-40% and continued margin expansion, and there is further room to grow for years to come.

The growth is not temporary and not pandemic-demand based, but rather permanent market share gains from sticky long-term customers. Crucially, much of Silicon Motion’s main competition is exiting the controller market, ceding the field to the company. Across all three of the major product lines (eMMC, UFS, and Client SSD = ~90% of their business), they are gaining market share, gaining sticky long-term customers, and losing competition.

Mordechai believes that investors would be hard-pressed to find a similar combination of high growth, high profitability, low risk, and a cheap valuation elsewhere in the equity markets.

Listen to this session:

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About the instructor:

Mordechai Yavneh is the founder and manager of New York-based Focus Capital Management, LLC, a boutique long-only hedge fund launched in 2013. Focus Capital Management is a fund with a fairly unique approach to investing. Our unique advantage comes from implementing and capitalizing on the value that concentration brings to an investor’s portfolio. We believe that focusing our time, energy, research, analysis, and resources on our best ideas generates superior long-term returns with a reduced level of risk built into each investment. We aim to invest in 4-5 positions at a time, and we believe this concentration and the deep research we invest in each of our positions is the driver behind our long-term success.

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