Silicon Labs Gets A Bit Interesting

I realize that the only way I am ever going to own Silicon Labs (Nasdaq: SLAB) again is if I buy the stock on a sell-off because of growth worries. Well, maybe that is what we have now after the second quarter earnings report and guidance.

SLAB had an okay second quarter; revenue was up 6% sequentially and up 29% from last year's level. Less exciting, though, was the fact that the company's revenue was pretty much in line with the average analyst guess - let's face it, people want "beat and raise" these days. The company saw good strength in microcontrollers, tuners for TVs, and audio chips, but the broadcast business was soft and there was weakness in set-top boxes and voice-over-DSL.

SLAB did do alright on profitability, though. Gross margins ticked up 150bp and the company delivered good EPS growth relative to expectations.

The big problem for SLAB was guidance. The company actually lowered its third quarter guidance to a point below the prior guess. That is tantamount to a cardinal sin these days. Weakness is coming from a sharper fall in FM tuners and bad prospects for the European telecomm sector. All in all, these are not fatal issues and underlying themes like SLAB gaining share in MCUs by integrating peripherals with its MCU core are still intact.

So, when I run a valuation analysis I get a price target of $48.50 - about 18% below today's price. That is not good enough to move me to "buy", but it is pretty close; close enough, certainly for "watch this very carefully". I already own (and still prefer) Microsemi (Nasdaq: MSCC) mostly because the expectations and valuations on MSCC are relatively so soft. I could also get behind taking a look at names like Linear Tech (Nasdaq: LLTC) or Analog Devices (NYSE: ADI) on a relative outperformance/relative value basis.

And not to be left out, ON Semiconductor (Nasdaq: ONNN) is still one of my all-around favorite semiconductor names in general. When I bought MSCC a few months ago, it was a veritable coin flip between MSCC and ONNN.

Back to SLAB ... this is a name that I could see trying to own through a whole semiconductor cycle, even though a lot of people would argue that it is silly to hold a name that you *know* is going to have wild ups and downs. My problem with that is that I have tried to guess the cycles before and I have been wrong (like most analysts have been trying to guess the cycles on a name like Intel (Nasdaq: INTC). Much as it hurts to own a stock during a 20% or 30% pullback, it is arguably even more maddening to sell a stock and see it jump another 25%.

All in all, SLAB is really close to a price that is really interesting. But with so many ideas to choose from, I am not jumping on "close" today.

Disclosure - I own shares of MSCC