Morgan Stanley: Silicon Motion’s enterprise business scales up: margins rise alongside working-capital requirements

Where did the third-quarter upside come from?

Third-quarter 2026 revenue rose 24% quarter over quarter and 131% year over year, coming in 1% above Morgan Stanley’s estimate. Enterprise SSD solutions were the main driver. The bank attributed growth to both favorable NAND prices and higher shipments of enterprise SSD solutions and controllers.
A better product mix and favorable NAND prices lifted gross margin by 3.4 percentage points quarter over quarter to 53.6%, while operating margin rose from 22.4% in the second quarter to 29.0%. Non-GAAP earnings per share were 4.37 dollars, exceeding the bank’s estimate and market consensus by 27% and 31%, respectively.
The company expects fourth-quarter revenue to rise another 5%–10% quarter over quarter, with growth in enterprise controllers and solutions outweighing weakness in UFS, eMMC and client SSD controllers. The midpoint of its gross-margin guidance is 54.2%.

The company expects revenue to grow more than 40% year over year in 2027, with stable gross margin and growth driven by the enterprise business. Morgan Stanley considers the target relatively achievable and expects the enterprise business to account for more than half of total revenue in 2027 as solutions and MonTitan controllers scale up.
Morgan Stanley raised its 2027 revenue forecast from 2.95 billion dollars to 3.053 billion dollars and its non-GAAP earnings-per-share forecast from 20.77 dollars to 22.99 dollars. The bank believes growth in 2028–2029 is the more worthwhile discussion.

Boot drives store the boot system and control software for servers and switches, supporting device initialization and failure recovery. The company sees an opportunity in boot drives located close to the CPU and equipped with DRAM, and estimates the related addressable market could reach 10 billion dollars by 2030.
Based on Vera Rubin rack shipments, the price per module and Silicon Motion securing a 30% share of modules, Morgan Stanley estimates boot-drive module revenue could rise from 83 million dollars in 2026 to 362 million dollars in 2027, representing approximately 4.3% and 12.3%, respectively, of the company’s total revenue under the bank’s scenario.
For conventional servers and ASIC applications, the bank estimates that, at a 5% market share, boot-drive modules could contribute approximately 400 million dollars in revenue in 2027, or about 13.6% of the company total revenue forecast used in its calculation. These outcomes depend on device shipments, module prices and the company’s share.

Morgan Stanley forecasts net income of 411 million dollars in 2026, but an operating cash outflow of 100 million dollars, including 542 million dollars consumed by changes in working capital. In 2027, net income is expected to rise to 766 million dollars, with an operating cash inflow of 160 million dollars and cash consumed by changes in working capital increasing to 636 million dollars.
The bank raised its earnings forecasts for 2026–2027, but left its 2028 forecast broadly unchanged, maintaining its 400-dollar price target and Overweight rating. Changes in enterprise SSD market share, weakening demand and inventory issues are among the downside factors it lists.