Upgraded Guidance Boosts The Dialog Semiconductor Bull Argument

Demand for consumer electronics like tablets, notebooks, and wearables continues to be healthy given the work-from-home and overall "stay-at-home" trend, and that's continuing to boost the results at Dialog Semiconductor (OTCPK:DLGNF). Not only did management guide to a healthy beat relative to the sell-side for the third quarter, but it also said that strength has continued on into the fourth quarter.

I was bullish before on Dialog, and I'm still bullish after this little run-up in the shares. I believe the Street continues to undervalue the company's sub-PMIC content opportunities with Apple's (NASDAQ:AAPL) iPhones, as well as opportunities in areas like battery management and charging. Longer-term opportunities in IoT are definitely more "show me" stories, as is the possibility of the company using partnerships with Xilinx (NASDAQ:XLNX) and Renesas (OTCPK:RNECY) to leverage its power management capabilities into auto market segments like ADAS and infotainment. With the shares offering attractive upside on the sub-PMIC business and heavily discounted long-term estimates of IoT and auto sales, I believe these shares are attractive.

The reported liquidity on Dialog ADRs is not good, but more and more brokers have made trading in European markets easy and relatively cost-effective.

 

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Upgraded Guidance Boosts The Dialog Semiconductor Bull Argument

With Apple No Longer An Overhang, Dialog Needs To Build Its Future Business

I thought Dialog (OTCPK:DLGNF) (DLGS.XE) was undervalued back in January on ongoing uncertainty over the company’s relationship with Apple (AAPL) in power management chips and what the future of Dialog would look like. Since then, the shares have shot up about 50% as investors have come to a more rational set of expectations regarding the ongoing contributions of sub-PMIC sales to Apple and emerging opportunities in connectivity and charger products.

I do like Dialog’s emerging portfolio in low-power connectivity, a key enabling technology for IoT, and I like the amount of capital management has on hand to deploy toward more business-building deals. Management has been disciplined here so far, and I hope that will continue. Now, though, the shares are valued much more like any other semiconductor company, and while I don’t think the valuation is inflated, I also don’t see a big discount to underlying fair value.

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With Apple No Longer An Overhang, Dialog Needs To Build Its Future Business

Dialog Has Managed The Apple Situation Well, But Considerable Uncertainty Remains For What's Next

For a company that relies upon Apple (AAPL) for about three-quarters of its revenue, and has acknowledged that Apple will be switching to insourced options for more than half of that relatively soon, I believe Dialog Semiconductor’s (OTCPK:DLGNF) (DLGS.XE) executive team has managed the ensuing chaos about as well as you could reasonably ask. An IP/asset transfer and revenue-prepay deal de-risks the next few years and gives more clarity on what the new Dialog may look like, and a cash-rich balance sheet gives management M&A options while also funding a decent-sized buyback.

There’s a lot that Dialog still has to figure out. Still, this is a company that should have a non-Apple business with over $500 million in revenue in 2020, growing at a double-digit rate and supporting operating margins at least in the mid-to-high teens. If the company can find a value-building M&A transaction or two (and that’s a bigger-than-normal “if” with this company), there’s a real chance that Dialog 2.0 could be an interesting company. Valuation is more complicated now, but I do still see some upside in the shares, though I’d note that there are a lot of decent bargains in the chip space that don’t have this level of drama or uncertainty.

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Dialog Has Managed The Apple Situation Well, But Considerable Uncertainty Remains For What's Next

The Market Expects Relatively Little From DSP Group's Transformation

DSP Group (DSPG) is trying to do a difficult thing in the chip space and basically reinvent itself with new applications for its core competencies in voice integration and low-power functionality. Somewhat unusually for the chip group, it’s not staking its turnaround/reinvention on a sizable M&A transaction, and is instead trying to reinvest the earnings it still generates from its fading lead business in DECT/CAT-iq SoCs for cordless phones.

In targeting markets like home gateways, low-power IoT connectivity, enterprise VoIP, and voice user interface SoCs, I believe the company is making logical decisions about where it can apply its core technologies and generate better growth in the coming years. There are admittedly not really any blockbusters here, but likely enough to generate decent revenue growth and margins in the coming years. For now, though, the Street isn’t buying it, as the shares seem to trade in line with some rather lackluster expectations.

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The Market Expects Relatively Little From DSP Group's Transformation

Dialog Semiconductor Gets Rewarded For Walking Away From Synaptics

Battered power management semiconductor company Dialog Semiconductor (OTCPK:DLGNF

) (DLGS.XE) has done a little better since my last update on the company, as the market has reacted positively to a favorable second quarter pre-announcement, and now, the announcement that it has terminated merger discussions with Synaptics (SYNA).

Overpaying for Synaptics wasn’t going to help Dialog, but Dialog does still need a lot of self-help. The company is looking at a steep downward turn in power management integrated circuit (or PMIC) revenue from Apple (AAPL), and the company is a long way from solid traction in markets outside mobile (and/or with customers other than Apple). Although the shares no longer trade at a discount to zero value in the mobile business, there could still be upside if Dialog can grow its rapid charging, connectivity, and auto/industrial businesses and/or find a new M&A dance partner.

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Dialog Semiconductor Gets Rewarded For Walking Away From Synaptics

Power Integrations' Revenue Re-Acceleration Looking More Like A 2019 Event

All you need to be a successful semiconductor loved by investors is perpetual double-digit revenue growth, 60%-plus gross margins, 30%-plus operating margins, a rich buyback, expanding end-markets, and optionality on both ends of the M&A spectrum. See? Simple.

Sarcasm aside, Power Integrations (POWI) has been in a tougher spot recently, with the company missing a few times on the top line and lowering guidance. A slowdown in smartphones and communications and delays in other programs has pushed revenue growth down from the double-digits, and the margins remain sub-optimal. Add in a relatively robust valuation, and I’m not too surprised that the shares have lagged the SOX by a significant degree since my last update, not to mention underperforming peers/rivals like ON Semiconductor (ON). With the shares already pricing in a return to double-digit revenue and a mid-20%’s operating margin, it’s tough for me to see a compelling risk-adjusted opportunity here.

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Power Integrations' Revenue Re-Acceleration Looking More Like A 2019 Event

Dialog Semiconductor On The Clock

A year ago, the debate around Dialog Semiconductor (OTCPK:DLGNF) was whether or not there was any substance to bearish rumors and predictions that Apple (AAPL) was working on its own power management integrated circuits (or PMICs) and would use them to replace Dialog’s chips in its iPhones and other products. With Apple having since done exactly that (although not completely), now the debate is how far the substitutions will go and what Dialog can do to preserve and rebuild its business absent contributions from Apple that have historically made up 70% or more of revenue (and high-margin revenue at that).

Both Dialog and Synaptics (SYNA) have confirmed that they’re discussing a merger; while Synaptics has been a frequent-flier on sell-side “likely to be bought” charts, and there would be potential synergies in such a deal, Dialog’s iffy history in M&A doesn’t lend a lot of confidence. The good news, such as it is, though, is that the market is already pricing in a very dire outlook for this beaten-up chip company.

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Dialog Semiconductor On The Clock

Nordic Semiconductor's Renewed Growth Has Melted Some Of The Skepticism

It has been an interesting twelve months for Nordic Semiconductor (OTCPK:NDCVF) (NOD.OL), a small Norway-based fabless semiconductor company focused on low-power wireless chip solutions.

During 2016, Nordic Semi had a poor run of quarterly results and saw a peak-to-trough run from the spring of 2016 to the spring of this year that took about 40% off the share price as investors worried about market share losses to rivals like Texas Instruments (TXN) and concerns about whether this small company with a relatively limited line-up could continue to compete effectively with larger players like TI, Dialog (OTC:DLGNF), Qualcomm (QCOM), Microchip (MCHP), Silicon Labs (SLAB), and the many other plays in low-power wireless.

The last two quarters have been stronger, though, and the shares have regained a fair bit of the ground lost in 2016 and early 2017. While wearables and consumer electronics remain tough markets, the company is seeing strong growth in its building/retail business and will be sampling its new low-power cellular IoT chips before the end of the year.

Nordic Semi doesn't look especially cheap on the fundamentals, but that's often the case with growth tech stocks; if Nordic can deliver high-teens growth for a few years and keep its margins up, the shares should continue to rise. That said, investors should note that the U.S.-listed ADRs are not very liquid; investors who can trade on foreign exchanges will find better liquidity on Nordic Semi's home market.

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Nordic Semiconductor's Renewed Growth Has Melted Some Of The Skepticism

Dialog Semiconductor - Too Good To Be True?

I don't want to like Dialog Semiconductor (OTC:DLGNF) (DLGS.XE). I don't like companies that get overwhelming amounts of revenue from a single customer, or companies with such erratic margins and no clear signs of ongoing improvement. Add in an unfocused/unclear M&A strategy and a U.S. ADR that has unusably low liquidity (the Xetra-listed shares are FAR more liquid and that's the way to invest, if you choose to do so...), and there are plenty of reasons to avoid Dialog.

And yet.

The valuation on Dialog looks a lot lower to me than it should be, even when I apply penalties to reflect the lack of diversification and so on. Even 4% to 5% long-term revenue and FCF growth would offer upside to today's price, and these shares could be meaningfully undervalued - particularly if you believe that the company can reinvest its sizable cash position into value-building M&A. Granted, if Apple (NASDAQ:AAPL) drops Dialog's PMICs then all bets are off with respect to valuation, but investors could do well from here if these renewed worries prove overdone.

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Dialog Semiconductor - Too Good To Be True?

Power Integrations Looking To Grow Share In Growing Markets

Admittedly, the power components segment of the semiconductor market isn't the most exciting, and Power Integrations (NASDAQ:POWI) doesn't have the best performance record relative to the PHLX Semiconductor index over the years. That said, the company has managed to grow revenue relatively consistently and generate decent returns on capital despite erratic margins.

Looking ahead, there are definitely opportunities for Power Integrations to drive more growth. The company is under-exposed to industrial markets like industrial controls and drives, automation, inverters, and electric/battery-powered tools and vehicles, but new products should drive share growth. Growth markets like rapid charging and LED drivers also provide attractive opportunities for this small cash-rich company.

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Power Integrations Looking To Grow Share In Growing Markets