How to Start Investing in 2026: The Growth Stock I'm Buying Before Year-End
Key Points
Memory product demand and prices are surging, as shortages are expected to continue through 2031.
Silicon Motion Technology has recently been setting ambitious guidance and then crushing it.
Its memory products are critical for AI data centers, but it's still an overlooked stock with a market cap just below $10 billion.
I'll be buying more shares of Silicon Motion Technology (NASDAQ: SIMO) by the end of 2026. It's a growth stock that aligns with the memory boom, and it's not too late to get on board.
While giants such as Nvidia and Micron (NASDAQ: MU) are more well known, I often gravitate toward the smaller companies that are expanding their market share. Here's what I like about Silicon Motion Technology.
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Understanding the memory boom
Silicon Motion Technology produces memory products like solid state drives (SSDs) and NAND flash controllers, along with SSD boot drives. These products are integral to AI data centers, so it is important to understand the climate of that industry when assessing Silicon Motion Technology, specifically.
Just three major players dominate the memory chip business. Micron is the only one based in the U.S., and it is selling out capacity well in advance. Samsung has already locked up deals for 70% of its memory chip capacity through 2031. SK Hynix is selling well too, and plans to double its memory production capacity by 2031. Analysts at Citigroup now anticipate the memory chip shortage will persist through 2031.
The wide gap between supply and demand has resulted in higher prices for memory products and higher margins for producers like Silicon Motion Technology. The hyperscalers so far seem to accept it as the cost of doing business. Amazon pointed to high memory costs when explaining why it raised its annual capital expenditure budget for this year from $200 billion to $220 billion.
Silicon Motion Technology operates in a high-growth industry with multiyear tailwinds where the largest customers simply accept that they will have to pay higher prices for years to come. It's also why many of those large customers are opting for multiyear deals to secure supply even at the current high prices.
Silicon Motion Technology is boosting revenue and expanding margins
Not every memory product provider will win in the AI era, but understanding what's happening in the memory industry highlights the types of available long-term opportunities. Not only is Silicon Motion Technology well exposed to this industry, but it's gaining market share rapidly.
The memory provider reported 127% year-over-year revenue growth in the second quarter, and net income grew more than sevenfold, resulting in a 30.2% net profit margin.
Silicon Motion Technology also reported exceptional growth for its AI-focused segments. Sales of its SSD boot drives grew by 1,695% while its eMMC+UFS controller sales roughly doubled.
Those successes prompted Silicon Motion Technology to project up to $541 million in Q3 revenue, which would equate to 124% year-over-year revenue growth. Notably, the top of management's revenue guidance range for Q2 was $411 million, and it ended up with sales of $451 million. If Silicon Motion Technology outperforms like that again in Q3, the stock would deserve a massive rerating.
Silicon Motion Technology remains overlooked
Micron and Sandisk are two of the most high-profile memory stocks. The latter has rallied by more than 600% year to date. Silicon Motion Technology has also done well, roughly tripling in value this year, but it has been seesawing since June, despite meaningful fundamental improvements. It still has a market cap below $10 billion, which means it isn't on as many people's radars. It's a relatively small company compared to the leading memory product providers.
Silicon Motion Technology also only trades at a 19.6 forward P/E ratio. It previously traded at a forward P/E ratio above 40, but its valuation continues to get cheaper as its revenue and net income growth rates surge.
The company's next earnings report is due in late October. I intend to build my position leading up to that report. Micron's fiscal 2026 fourth-quarter results demonstrated that memory product providers are still crushing guidance and establishing ambitious forecasts for upcoming quarters.
The memory trade doesn't appear to be slowing down, so it's only a matter of time before Silicon Motion Technology regains its momentum.
Citigroup is an advertising partner of Motley Fool Money. Marc Guberti has positions in Silicon Motion Technology. The Motley Fool has positions in and recommends Amazon, Micron Technology, and Nvidia. The Motley Fool has a disclosure policy.