Silicon Image: Controlling your digital content

In most businesses, diversification is the key to steady profits. There is a chip manufacturer in Sunnyvale, California that recognizes that truth and successfully serves a variety of different consumer electronics markets.

Silicon Image (NASDAQ: SIMG) designs and develops semiconductors for the secure storage, distribution and presentation of digital content. Its products are used in a variety of devices, including digital televisions, DVD players, set-top boxes, audio/video receivers, game consoles, high definition camcorders and digital still cameras. The company also offers its own consumer electronics devices, including high-definition multimedia interface transmitters and receivers, as well as products that connect PCs to digital displays. Silicon Image has strategic relationships with the likes of Walt Disney (NYSE: DIS), Sony (NYSE: SNE) and Hitachi (NYSE: HIT). Texas Instruments (NYSE: TXN) is a major competitor.

The firm pleased investors earlier in the month, when it announced that it expected first quarter revenues to come in essentially in-line with the consensus Street estimate. Management also said it sees gross margins exceeding the previously provided range. RBC Capital Markets subsequently upgraded the stock to "outperform."

SIMG shares popped into a bullish "pennant" consolidation pattern on the news and are now attempting to exit that pennant to the upside.

Brokers recommend the issue with two "strong buys," one "buy," nine "holds" and one "sell." Recent price targets fall in the $11-$13 range. Analysts see a 60% growth rate through the next year. The SIMG P/E ratio (18.74), PEG ratio (0.93), Price to Sales ratio (2.67), Price to Book ratio (2.57), Price to Cash Flow ratio (15.72), Price to Free Cash Flow ratio (24.21), EPS Growth rate (31.25%), Net Profit Margin (14.40%), Return on Assets (13.85%) and Return on Investment (17.36%) compare favorably with industry, sector and S&P 500 averages.

Institutions hold about 77% of the outstanding shares. Over the past 52 weeks, the issue has traded between $7.96 and $14.68. A stop-loss of $7.95 looks good here. Note that the firm is expected to announce first quarter results on May 3, after the close.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.