PSB Monthly Issue November 2013

Have you ever stopped to consider the technology behind HD?  Probably not.  And I bet you’ve never given a second thought to that cable running between the TV and the cable box – the HDMI cable.

These days, the HDMI (High-Definition Multimedia Interface) specification has since been adopted by over 1,000 companies and is the standard digital interface on billions of devices.

Here’s the thing…

At some point in time, the electronics industry had to decide to adopt HD technology as we know it today.  And, they had to agree a HDMI port would be standard on HD televisions and set top boxes.

In fact, HDMI was developed by electronics giants such as Hitachi, Panasonic, Philips, Sony, and Toshiba.  But there was one more company involved in the development of HDMI technology – one you may not be familiar with.

That company is Silicon Image (NASDAQ: SIMG).

Now, SIMG is hard at work developing the next wave of technology we’re all sure to be seeing on our devices in the near future.

THE HD CONNECTIVITY BUSINESS

SIMG is a leading provider of connectivity solutions enabling the reliable distribution and presentation of HD content for consumer electronics, mobile, and PC markets.  The company provides its technology using semiconductors and other intellectual property compliant with global industry standards.

The company’s products are deployed by the world’s most important manufacturers in devices such as mobile phones, tablets, Blue-ray players, digital televisions, digital cameras, receivers, and laptop and desktop computers.  Basically, any electronic entertainment device has a good chance of utilizing SIMG’s technology.

As I mentioned earlier, Silicon Image helped drive the creation of the HDMI industry standard.  Now the company is focusing on the next phase of technology – the standards for mobile devices and wireless HD.

Let’s take a closer look…

SIMG is once again working with industry leaders such as Samsung, Nokia, Sony, and Toshiba to create an industry standard optimized for mobile devices. This technology, called MHL, is essentially HDMI, but better suited for mobile devices.

An MHL connector requires only 5 pins, so it takes up less real estate than an HDMI connector.  Thus, it is ideal for mobile devices where space is a key limitation.

The market for MHL is huge.  The company estimates 25% of smartphones will have an MHL port by the end of 2013 – and it already accounts for 70% of the company’s revenue.

Even better, HML should eventually be standard on the vast majority of smart-phones, which are projected to ship1.3 billion units by 2015.  That doesn’t even include other devices (such as tablets) which will also use HML technology.  Clearly, the market is enormous.

And that’s not all…

SIMG is also developing WirelessHD technology.  This single-chip mobile transmitter will allow wired-quality performance and reliability over wireless signals.  The applications are numerous.

And of course, the market size is massive. Basically, any wireless device could be a potential destination for a WirelessHD chip. Between MHL and WirelessHD, SIMG has the potential for incredible revenue growth.

Speaking of revenues, let’s look at the company’s financials.

THE NUMBERS

SIMG isn’t just a good investment based on revenue potential.  The company’s financials are already stellar in nearly every aspect.

Third quarter revenues came in at $79.3 million, a 7.3% increase from the same quarter last year and a 7.6% sequential increase.  The gains were driven by wider adoption of the MHL standard.

Meanwhile, net income was $9 million or $0.11 per share.  That’s more than double last quarter’s $4.2 million, or $0.05 per share.  The company lost money in last year’s third quarter due to a temporary impairment, so it doesn’t make for a sound comparison.

More importantly, SIMG holds $134 million in cash and has zero debt.  That’s equal to $1.73 per share in cash for a stock only trading just over $5.00 per share.  In addition, current assets are an impressive 3.8x current liabilities – no surprise for a company with a boatload of cash and no debt.

Management has been using some of the cash to buy back shares – a very bullish signal for investors.

INVESTMENT RISKS

As with any investment, SIMG does have a few risks.

An unexpected slowdown in the economy could reduce demand for electronics devices in general and slow the company’s revenue growth.

New competitors could enter the field and make securing new and existing customers more difficult.

Finally, if another technology standard becomes more prevalent than MHL or WirelessHD, the company could lose significant business.

POTENTIAL RETURN OF 75% OR MORE

SIMG is in great position for a run higher.  The company is a leader in HD connectivity technology, and its products are rapidly gaining market share.  Plus, Silicon Image has excellent financials.

Nevertheless, investors are mostly oblivious to the company’s value.  SIMG shares are trading at just 1.5x sales and 14.8x projected earnings.  The price to sales ratio is substantially lower than the industry average of 2.5x sales.

Moreover, the projected earnings number is low considering analysts project the company to grow earnings by 15% per year for the next five years.

Based on our analysis, we see SIMG climbing to $9.00 a share or more.  Buy the shares now for potential gains of 75% or higher!

ACTION RECOMMENDATION

BUY Silicon Image (NASDAQ: SIMG) up to $5.90 per share.

Don’t forget your position sizing and stop-loss rules.