Silicon Image Inc. (SIMG: NASDAQ) is a “little giant” in the high definition game. Silicon Image makes the semiconductors that help deliver high-definition content to HDTVs and video game systems. HD television sets are insanely popular right now, and this demand is expected to grow by leaps and bounds.

Just look at these numbers: At the end of 2006, there were 85 million installed High Definition Multimedia Interfaces. By the end of 2010, industry experts are predicting more than 1 billion installed HDMI’s. High Definition Multimedia Interface-- the newest technology for video and audio transfer-- is only one of the areas where Silicon Image has made its mark.

The company is also involved in Digital Visual Interface specification (DVI), a standard to maximize the video quality of digital displays, including PCs and TVs, and Serial Advanced Technology Attachment specification (SATA), a technology for connecting hard drive disks and other storage devices. This allows for a faster transfer than either Parallel Advance Technology Attachment specification (PATA) or USB connectors.

Silicon Image works with all of the heavy hitters in Hollywood, including Universal, Warner Brothers, Disney, and Fox, not to mention consumer electronic giants like Sony, Hitachi, Toshiba, and Philips.

In the beginning of August, Silicon Image shares were hit hard. The company reported second quarter earnings of $0.05 a share, compared to $0.07 a year prior. Analysts and investors were looking for $0.07. Revenue was up 13% to $79.77 million from $70.58 million a year earlier, spanking analyst estimates of $77.00 million. But it wasn’t enough. The company also lowered quarterly and full-year guidance, and investors couldn’t sell fast enough.

The stock tanked. It went from more than $7 on Aug. 2 to close at $5.26 the very next day. For some investors, this is the end of the story. But we can see tremendous value in Silicon Image shares, even after the guidance has been lowered.

First, the company’s P/E is clocking in at a very low 12.1 (that’s about half the industry average). Its price to sales comes in at about 1.5, which is less than half what other stocks in this sector trade near. That’s an absurd valuation for a small, growing company-- even one that’s hit a few bumps in the road. The stock price could double and it wouldn’t be anywhere near overvalued.

Then there’s Silicon Image’s stock repurchase plan. In February, the company began a 36-month stock repurchase program of up to $100 million. The company’s already bought back $31.1 million through June. Buying back shares not only shows that the company has faith in its operations, but also that it is dedicated to increasing shareholder value.

The third bullish indicator is Silicon Image CEO Steve Tirado buying 20,000 shares on August 20 for $5.30. That’s Tirado’s first buy since Spring 2006, whjen he picked up 10,000 shares for $9.

How Silicon Image Can Beat the Street

At the beginning of 2007, Silicon Image made two important acquisitions to expand its portfolio. First, it acquired Sci-worx for $15.8 million. With this purchase, the company received intellectual properties associated with the development of system-on-a-chip (SoC) for storage, distribution, and presentation of HD content.

Then in February, Silicon Image signed a license agreement where it exchanged technologies with Sunplus Techonologies for $40million. Shipping for these related products would start in 2008.

In the more immediate future, Silicon Image has a new category of analog products that are to be released during the next two quarters. If these are successful, Silicon Image could bounce back and surpass estimates.

Buy Silicon Image.