Silicon Labs: A Growth Story That Is Dented, And Maybe Delayed, But Not Derailed

“Buy the dip” is a piece of advice that can make investors a lot of money over time, but it’s also difficult advice to follow. Every once in a while there’s a market, sector, or stock-specific “freak out”, but more often than not, meaningful dips come with scarier changes in the near-term outlook. The Street being what it is, it’s not uncommon for those near-term changes to lead to big swings in long-term outlooks, estimates, and target prices, as many analysts seem to forget that cyclical stocks/industries cycle in both directions.

Since my last update, Silicon Labs (NASDAQ:SLAB) has outperformed the broader semiconductor space by about 15%, as the company has continued to post strong growth from its IoT-focused business. While there is growing evidence of an impending slowdown (echoed by other players in IoT), this hasn’t been outside of my expectations. I do see elevated risk to sentiment and near-term estimates, but I also think Silicon Labs is trading at a pretty attractive valuation relative to how growth semiconductor stocks typically trade.

 

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Silicon Labs: A Growth Story That Is Dented, And Maybe Delayed, But Not Derailed

There's A Growing Separation Between Silicon Labs' Long-Term Potential And The Current Valuation

 

Second chances to buy strong growth stocks are always worth a look, particularly if there doesn't seem to be anything broken with the fundamental growth story. Such would seem to be the case at Silicon Labs (NASDAQ:SLAB). I can understand some disappointment with management not guiding to stronger longer-term profitability at the recent Analyst Day, but the core IoT growth story (driven by strong wireless capabilities at SLAB) is still very much intact.

Clearly, there are a lot of factors beyond Silicon Labs to consider now. The market is clearly not as interested in growth stocks now, and the semiconductor sector has weakened in light of the increasing likelihood that peak growth and margins have been seen (or are in sight) for the cycle. It will take time for those issues to work themselves out, but I still see Silicon Labs as a double-digit grower and that makes the stock valuation today considerably more interesting.

 

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There's A Growing Separation Between Silicon Labs' Long-Term Potential And The Current Valuation

Silicon Labs Isn't As Expensive As You Might Think For A Pure IoT Growth Play

 

Valuation is relative, and by no means am I saying that Silicon Labs (SLAB) is "cheap". But what I am saying is that given how the Street values pure-plays on growth markets (like IoT in this case), not to mention scarcity value and the quality of the portfolio, the shares aren't as ridiculously valued as you might immediately assume for a company trading at close to 6x 2022 revenue and around 80x 2022 P/E.

Silicon Labs has built an impressive wireless IoT portfolio, giving the company strong exposure to one of the fast-growing markets within semiconductors (consumer and industrial IoT). Provided that Silicon Labs can leverage its technology into industrial applications beyond metering, allowing it to fully participate in the growth of industrial IoT, I see a credible path to double-digit revenue growth and mid-20%'s margins in around five or six years.

None of that leads me to the conclusion that Silicon Labs is undervalued now, but in a semiconductor market where "not too expensive" is the new "cheap" for many stocks, it's at least worth a spot on a watchlist.

 

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Silicon Labs Isn't As Expensive As You Might Think For A Pure IoT Growth Play

Silicon Labs Surges As The Growth Story Comes Back Into Focus

Investors, particularly institutional investors, can be a fickle lot, and I believe you can see that to some extent in Silicon Labs’ (SLAB) price history. Although the IoT business has continued to grow, particularly the connectivity side, the shares have chopped around as the stock has gone in and out of favor as a growth stock.

With recent rumors that the company is shopping the “analog business”, a move that would make Silicon Labs a much more streamlined IoT connectivity growth story, the growth stock angle has come back into play, pushing the stock up more than 40% since my last update (even with a meaningful recent decline from its peak), about 10% better than the SOX over that time.

Silicon Labs has long been one of my “like the business, not crazy about the valuation” names, and that is certainly the case after this recent surge. I love the IoT connectivity angle to the story, but I think you have to be a growth-driven investor with little concern about valuation to find these shares appealing, and that’s simply not my investing approach.

 

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Silicon Labs Surges As The Growth Story Comes Back Into Focus

Valuation, Not Opportunity, Remains The Main Challenge With Silicon Labs

In terms of operating performance, I don’t have a lot to criticize with Silicon Labs (SLAB), as it once again did quite well in this quarter on a relative basis. Likewise, I don’t have much to quibble with or complain about in terms of the opportunity set in front of the company (other than thinking they need better MCU IP). The issue remains principally valuation for me, and the shares have lagged the SOX index by about 15% since my last update on the company.

With that underperformance, the valuation is a little more interesting. Management really needs to get the operating margins up to 30% for the discounted cash flow side to work, though I readily admit growth semiconductor stocks can trade well above DCF-based fair value for long stretches. I still am not crazy about the prospective value here, but I do still see some, and there aren’t as many quality growth stories in semiconductors as I’d like.

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Valuation, Not Opportunity, Remains The Main Challenge With Silicon Labs

Silicon Labs Executing On Its IoT Opportunity, With Infrastructure Likely To Get Better In 2020

Maybe valuation does matter, at least a little. When I last wrote about Silicon Labs (SLAB) I wrote that I’d at least somewhat thrown in the towel on valuation where this stock was concerned – investors prize the company for its focus on IoT and likely for its M&A takeout as well – but the shares have since underperformed the broader semiconductor space by about 10%. Then again, it could just be a reallocation of some resources in the sector, with other chip companies stumbling (if not crawling) toward the end of their correction cycle and investors wanting to establish positions for the broader recovery.

Whatever the case may be, the shares are still richly-valued, even on a hybrid EV/sales approach that factors in a takeout premium (based upon what companies like Infineon (OTCQX:IFNNY), NXP Semiconductors (NXPI), and ON Semiconductor (ON) have paid for wireless assets). I do believe Silicon Labs is still well-placed for above-average growth, particularly when the timing business recovers and as opportunities in auto mature, but paying premium prices for growth is not really my favored investment strategy.

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Silicon Labs Executing On Its IoT Opportunity, With Infrastructure Likely To Get Better In 2020

Healthy IoT Growth And Better Margins Support Silicon Labs

I’ve sort of thrown in the towel on valuation where Silicon Labs (SLAB) is concerned, accepting that the market is wiling to pay premiums beyond what I think is fair or reasonable to hold a position in one of the closest things to an IoT pure-play in the chip sector. To that end, my prediction from my last update that Silicon Labs could be a relatively attractive name in a growth-starved chip sector has helped up reasonably well, with SLAB continuing to outperform the chip sector as a whole.

Valuation doesn’t seem to be a consideration here; or at the very least, the Street is choosing to focus more on the buyout premiums paid for wireless assets like Cypress (CY), Quantenna (QTNA), and Marvell’s (MRVL) portfolio (3x-6x sales) than historical norms. Provided that Silicon Labs keeps growing, the party may not come to an end soon, but I have a hard time paying up to this extent.

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Healthy IoT Growth And Better Margins Support Silicon Labs

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

Lattice Semiconductor Posts A Good Quarter, But The Bigger Story Is Still Building

When I last wrote about Lattice (LSCC) I said “clearly the word is out” on this company’s turnaround/restructuring plan, but the shares are up another 25% since then as investors continue to wake up to the significant opportunities for Lattice’s low-power FPGAs in emerging applications like 5G and edge AI inference. With FPGA competitors like Xilinx (XLNX) and Intel (INTC) focusing on much different products and markets, and product performance challenges with would-be competitors from the MCU space, I like the set-up for Lattice over the next three to five years.

What I don’t like is the price. Even factoring in a significant revenue and margin ramp, it is difficult to call today’s price a bargain. While there is room for Lattice to exceed even bullish expectations, and investors love semiconductor growth stories (as seen with IoT-driven Silicon Labs (SLAB) ), I’m not inclined to chase the shares at this point.

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Lattice Semiconductor Posts A Good Quarter, But The Bigger Story Is Still Building

All Is Seemingly Forgiven As Silicon Labs Rockets Back Into Growth Investors' Good Graces

It’s been a wild ride for Silicon Labs (SLAB). Something of a growth darling (at least at times) over the last few years, Silicon Labs actually underperformed the SOX in 2018 and closed the fiscal year with an ugly miss-and-lower. While the shares had followed the year-to-date rally in semiconductor stocks, it was still lagging before a surprisingly strong first quarter seemingly shifted sentiment overnight.

I had previously said I’d be interested in SLAB in the low $70’s, and it never quite got there before this rocket ride back toward $110. Therein lies the problem with trying to be disciplined on price/value, particularly when it involves growth stocks. Although Silicon Labs looks too pricey now, I can understand why at least some investors are piling back in – SLAB is setting up attractive qoq growth rates at a time when many semiconductors still look likely to struggle to post attractive growth.

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All Is Seemingly Forgiven As Silicon Labs Rockets Back Into Growth Investors' Good Graces

MaxLinear Marking Time Ahead Of Commercial Ramps In 2019/2020, But Spending Less

I've thought that MaxLinear (NYSE:MXL) held some potential for more risk-tolerant investors for some time, but I was surprised to see the strong (approximately 25%) move in the shares since my last update. Granted, chip stocks have done well over the past month, with the SOX up almost 20%, and I think investors liked the company's guidance for much better opex in 2019, but it's still worth noting that the growth story here is tied to wireless access, backhaul, and optical interconnect opportunities that won't really kick in until late this year and where MaxLinear has to show it can elbow aside established players like Analog Devices (ADI), Broadcom (AVGO), and Inphi (IPHI).

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MaxLinear Marking Time Ahead Of Commercial Ramps In 2019/2020, But Spending Less

A Brutal Miss-And-Lower-Guide Has Silicon Labs' Growth Premium In Question

It’s generally accepted by most investors that you have to pay up for growth, but with the recent weak performance at Silicon Labs (SLAB), including an ugly guide-down for the first quarter, I’m concerned that these shares could be liable to investors asking “wait … why are paying up for this?” I had previously expressed my view that Silicon Labs was entering a rocky operational stretch, but this is a little worse than I’d expected, and the company definitely needs markets like IoT, isolation, and timing to start coming through in the second half of 2019.

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A Brutal Miss-And-Lower-Guide Has Silicon Labs' Growth Premium In Question

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

Cypress Semiconductor's Value Obscured By A Growing Wall Of Worry

Given the roughly 15% drop in the SOX over the past six months, it’s not too hard to find chip stocks that look more reasonably-valued, if not cheap, these days. The catch, though, is how well current expectations factor in the numerous risks that seem to be mounting early in 2019 – shrinking lead-times, weakening auto and industrial markets, weakening memory pricing, and so on. Although I do like the business mix at Cypress (CY), and I believe the company is well-placed to gain share in the auto and IoT markets in the years to come, weaker near-term conditions are definitely a risk and I think it will take some time before a margin-driven mid-to-high teens fair value gains any real traction in the market.

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Cypress Semiconductor's Value Obscured By A Growing Wall Of Worry

Silicon Labs Well-Placed For Long-Term Growth, But The Short-Term Could Get Rocky

With both fundamentals and sentiment in and around the semiconductor sector noticeably cooling, valuations are getting more reasonable and attractive on a long-term basis, but the correction process still has some distance to go. In an environment where GDP growth seems likely to slow, Silicon Labs (SLAB) could well be looking at a period where the improvements in the business go largely unrewarded by the market until institutional investors feel comfortable moving back into semiconductor growth stories.

I didn’t think Silicon Labs was attractively priced for a “buy” back in August, and the shares are down another 20% or so since then (slightly underperforming the SOX). I still don’t consider today’s price a slam dunk, but I do believe the company is making progress and becoming better-positioned for future growth in multiple end-markets. A price in the low $70’s would be more interesting to me, but I’m hesitant to dive into chip stocks today given the prospect for worsening outlooks for autos and industrial markets and the risk of at least another round or two (if not more) of cuts to expectations.

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Silicon Labs Well-Placed For Long-Term Growth, But The Short-Term Could Get Rocky

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

Microchip Looks Undervalued, But There Are Short-Term Challenges To Consider

Buying good companies on stumbles is a time-tested strategy, but one that stills carries risk – it’s not always easy to separate a stumble from a prolonged tumble down the stairs. In the case of Microchip (MCHP), while issues related to its recent Microsemi purchase loom larger in the short term, I’m a little more concerned about the potential impact of extended lead times and weakening demand in important end-markets.

I believe Microchip has proven itself to be a well-run chip company, and I like the company’s diverse capabilities across microcontrollers (or MCUs) and analog, as well as the new opportunities brought in with the Microsemi deal (including FPGAs, timing products, data center products, and so on). Although this may not be the ideal time to buy given sentiment toward the semiconductor space, the long-term value proposition makes this a name worth considering for more value-driven investors.

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Microchip Looks Undervalued, But There Are Short-Term Challenges To Consider

High-Flying Silicon Labs Gets Dinged As IoT Growth Hits A Lull

There are quite a few companies out there that would be more than happy to have a business where a slowdown to 11% year-over-year growth could be considered a lull, but then not many companies have enjoyed the sort of multiples and general growth enthusiasm as Silicon Labs (NASDAQ:SLAB). Although Silicon Lab’s multi-year track record relative to the SOX is still good, that gap has closed recently, and competitors like Integrated Device Technology (NASDAQ:IDTI) and Cypress Semiconductor Corp. (NASDAQ:CY) have pulled ahead on a one-year and year-to-date basis.

Silicon Labs is another one of those cases where I have liked the company for some time and been less comfortable with the valuation. I don’t think this slowdown in IoT revenue growth is an early sign of trouble to come, but I do think that high valuations carry high expectations, and Silicon Labs may have to deal with disappointed growth investors swapping out the shares for other semiconductor growth stories (like IDTI). Not yet at a buyable level for me, I suppose Silicon Labs’ current valuation is reasonable for a growth leader, but the reaction to second-quarter earnings underlines the risk of paying high multiples for high-growth stories.

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High-Flying Silicon Labs Gets Dinged As IoT Growth Hits A Lull

Integrated Device Technology Managing To Stay Ahead Of Expectations

Since my first write-up on the company for Seeking Alpha in September of 2017, Integrated Device Technology (IDTI) (or "Integrated Device") has done alright. The shares are up about 30% since then, outdoing the SOX by about 10%, more or less matching ON Semiconductor (ON), beating Silicon Labs (SLAB) by a bit, and handily outperforming Broadcom (AVGO) over that time. Better still, management has delivered performance that suggests that major drivers like server memory interfaces, wireless charging, and sensors, can, in fact, lead to significantly higher revenue and margins in the year to come.

Not surprisingly given the performance, the valuation argument is more of a stretch today. Trading at around 5x forward revenue, I'd argue the price today is a pretty reasonable reflection of the growth and margin potential at IDTI, but I also happily acknowledge that IDTI offers more near-term year-over-year growth potential than many other chip names and investors will flock to (and pay for) exceptional growth opportunities.

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Integrated Device Technology Managing To Stay Ahead Of Expectations

Semtech Has Made Progress, But Really Needs LoRa To Take Off

I wasn’t a big fan of seemingly perennial underachiever Semtech (SMTC) back in 2016, and the path since then hasn’t been entirely smooth. The company has done a little better than I’d expected with revenue (beating my circa-2016 expectations by 3% in the last two years), but adjusted free cash flow has been slow to develop, and the company’s key driver, LoRa, has come in well short of management’s targets from a few years ago.

With a strong move in the shares since the last quarter, the stock’s performance has been slightly better than the SOX since my last update, on par with Silicon Labs (SLAB), and below ON Semiconductor (ON) (and well above Maxim (MXIM) and MACOM (MTSI)), but I don’t feel like I’ve missed much with slightly-better-than-sector performance. I’m more encouraged by what I’ve seen recently in the data center and PON businesses, as well as protection, but a lot is riding on increased uptake/usage of LoRa. I’d also note that while I don’t see tremendous value here, the shares have appeal as a takeout candidate.

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Semtech Has Made Progress, But Really Needs LoRa To Take Off