Silicom - Next Stop $100?

| About: Silicom Ltd (SILC)


Silicom's revenue has grown dramatically over the past three years.

Incremental revenue from new products and new customers will keep revenue growing for the foreseeable future.

The company's OEM model and efficient R&D will allow margins to keep expanding.

In my previous article on Silicom (NASDAQ:SILC), I pointed out that the company traded inexpensively relative to its healthy revenue growth prospects and favorable operating leverage. Since that time the company far outstripped my forecasts on both the top line and the bottom line and the stock has responded positively. I now believe, based on reasonably conservative numbers, that the stock could reach the $100 mark by next year.

Building on last year's strong Q4 I think SILC can grow revenue by 42% in 2014 and achieve $3.25 in EPS. I think the company can then grow revenue 23% in 2015 and put up $4.00 in EPS. Putting a (well deserved) 25x P/E multiple on 2015 EPS and adding back the $6.58 in cash (post-dividend) gets you to a $107 stock price.

The drivers underlying Silicom's growth continue to be the same as I mentioned in the last article. They are selling into the WAN optimization and security markets, both healthy growers and high priority items for CIOs. Within security, there is a firewall refresh cycle going on as companies need their firewalls to work at 10G/s versus where they are today at 1G/s. This increase in new firewall purchases will benefit SILC as it has cards in most vendor's appliances. Increased emphasis on data security based on the recent spotlight on the NSA is causing companies to want to encrypt their data traveling between locations, and Silicom is well-positioned with its variety of encryption cards. The company's recent timestamp cards get it into a new market and it believes that there will be meaningful revenue from these products in 2014. Virtualization in data centers will drive usage of Silicom's intelligent adapters that offload I/O tasks from the main CPU. All of these drivers are in place to maintain healthy growth at the company. While SILC is a technology company with the usual quarter to quarter volatility in revenue, I think that long-term holders of the stock will once again be rewarded.

Disclosure: I am long SILC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.