Good News for Micron Technology Brings Bad Tidings for Silicon Motion

By Anders Bylund Markets Fool.com

Memory-chip controller specialist Silicon Motion (NASDAQ: SIMO) reported fourth-quarter results Monday night. The company beat analyst expectations across the board, but followed up with weak guidance for fiscal year 2017. Share prices fell as much as 7% on the news.

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The issues behind Silicon Motion's disappointing outlook happen to be good news for us Micron Technology (NASDAQ: MU) shareholders. Here's how.

Fourth-quarter results and forward guidance

Silicon Motion's net sales increased 47% year over year, landing at $144.2 million. On the bottom line, adjusted earnings fell 11% to $0.95 per diluted American depositary share. Analysts would have settled for earnings of $0.80 per depositary share on something like $135 million in top-line sales. The company beat Wall Street's targets with ease.

However, the outlook for the first quarter of 2017, as well as the full year, was not so rosy.

In the next quarter, Silicon Motion expects revenue to increase 10% year over year, stopping at roughly $125 million. But analysts were looking for the 40% growth trend to continue, setting their sales targets at $150 million. Ouch.

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And for the full year, Silicon Motion's sales growth should slow down to approximately 5% and land near $585 million. Here, the Wall Street consensus pointed to more than $660 million. Another big miss.

Image source: Getty Images.

What's wrong?

In a prepared statement, Silicon Motion CEO Wallace Kou explained the soft guidance this way:

For full year 2017, we expect sales of our client SSD controllers to continue growing strongly, but NAND flash availability will affect our SSD Solutions. NAND flash tightness will start affecting our SSD Solutions beginning in the first quarter. Additionally in the first quarter, our client SSD controllers will decline seasonally, with growth restarting in the following quarter.

Some of this is plain old seasonality, as electronics manufacturers wind down their holiday-season production runs and start to plan for next year's gift-giving extravaganza instead. Analysts are familiar with this effect, so that's no surprise.

It's the tight supply of NAND flash memory that's holding Silicon Motion back. The memory industry recently ran through nearly two years' worth of dramatic oversupply and the resulting price wars, which led to the gilded sales growth you see in Silicon Motion's current results.

The price wars have ended, which means stable or even rising street prices for Micron's products. On the other hand, the reduction in the number of NAND chips on the market also leads to lower demand for the controller circuits that Silicon Motion makes. What's good for the goose is killing the gander here.

Image source: Getty Images.

What's next?

OK, nobody is "killing" Silicon Motion. Slower sales growth is not the same thing as shrinking revenue, and management expects operating margin to hold steady at the strongest levels seen in years. Silicon Motion will continue to make money, investors will not be wiped out, and the company will live to fight another day. Opportunistic investors might even shrug off a 24% share-price discount over the last six months and treat it as a buy-in opportunity.

Meanwhile, Silicon Motion's market update provided more fuel for the fires under Micron Technology. This round of strong chip pricing seems to have legs, and I expect my shares to keep rising for the next several quarters. Timing the swings of a cyclical industry can be tricky, but Silicon Motion just offered some fresh support for a continued upswing.

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Anders Bylund owns shares of Micron Technology. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.