Silicon Laboratories: Due For A Rebound; Support Not Far Away (NASDAQ:SLAB)

Silicon Laboratories (NASDAQ:SLAB) has now lost everything it gained in 2021, a year in which the stock soared higher by 62%. Moreover, if the trend in the last several months is any indication, then additional losses are likely in the second half of 2022. On the other hand, the stock may be near support, which could be enough to stem the slide, if not power a reversal altogether. However, some may still want to keep their distance, even if SLAB does try to stage a rebound. Why will be covered next.

SLAB is hurting, but relief may be near

SLAB has lost 41% YTD. In comparison, the iShares PHLX Semiconductor ETF (SOXX) has lost 37% YTD. The chart below shows how the stock has moved lower in 2022 after ending 2021 on a strong note with a huge rally in the fourth quarter. Note that even though SLAB ended 2021 up 62%, gains stood in the single digits as late as early October, before the stock took off in late October.

A descending channel can be observed if the recent lows and highs are connected to form trendlines. The trend appears to be down, suggesting lower stock prices are in store in the second half of 2022 as long as the channel remains intact. At the same time, the stock has been having trouble moving past the $120 region in recent days. The stock fell way below $120 on July 5, only to recover most of the losses by the end of the day.

It seems the stock may have hit support, which could explain the price action in recent days and why the stock was forced to get back above $120. A look at the chart below shows how the stock staged a reversal on several occasions in the last few years once it got to the $120 region. The stock had trouble closing above the $120 region when it was below it. Now that the stock is above the $120 region, the stock is having difficulties getting through and staying below it.

What used to be resistance tends to become support and this is what seems to be happening right now. It would also be consistent with recent history. Recall how the stock was able to reverse course once it found support in the $120 region in May 2021. While support can be broken, it’s possible that what happened last year may happen once again this year with the stock hovering just above the $120 region.

Why some may or may not want SLAB

There is reason to think SLAB is about to stage a rebound after a bad first half. Some may want to place bets on the stock for that reason. However, there are also those who may decide to pass on the opportunity for other reasons. For instance, valuations may be a problem for some.

Its true multiples have gone down with the stock losing over 40% of its value YTD, but SLAB still trades at a premium to most in the semiconductor sector. For instance, while SLAB has gotten better, it still finished in the red on a TTM basis, which is why there is no trailing P/E. On a forward basis, SLAB trades at 79x, higher than the sector median at 20x.

Keep in mind that SLAB got a huge cash infusion last year thanks to the sale of the Infrastructure & Automotive or I&A business to Skyworks (SWKS), a transaction valued at $2.75B in cash or $2.3B after tax. The cash balance of $1.9B is the main reason why enterprise value of $2.96B is much lower than the market cap of $4.36B. The table below shows the multiples SLAB trades at.

	SLAB
Market cap	$4.36B
Enterprise value	$2.96B
Trailing P/E	N/A
Forward P/E	79.39
PEG ratio	N/A
P/S	6.18
P/B	2.21
EV/sales	3.71
Trailing EV/EBITDA	37.94
Forward EV/EBITDA	14.00

Source: Seeking Alpha

Earnings growth has picked up, but could decelerate

SLAB is one of those stocks that trade at a premium, which could be justified if, for instance, they grow at a much faster pace than their peers. In that regard, SLAB’s performance over the years may be a stumbling block for potential buyers. For instance, revenue has grown at a CAGR of 4.8% and EBITDA has grown at a CAGR of minus 1%, both in the last ten years.

However, SLAB has been doing better as of lately. Q1 FY2022 revenue, for instance, increased by 48.1% YoY to $233.8M. Note that the Q1 FY2021 numbers have been adjusted to account for the sale of the I&A unit. If the former I&A unit is included, then revenue was $255.5M. The non-GAAP numbers have been excluded to avoid comparing apples to oranges.

Earnings were much better than expected with GAAP EPS of $0.58 and non-GAAP EPS of $1.05, both from continuing operations. In comparison, SLAB’s own guidance had called for GAAP EPS of $0.15-0.25 and non-GAAP EPS of $0.58-0.68. The jump in earnings was facilitated by gross margins that came in much higher than expected, which helped EPS growth. Note that the GAAP losses in Q4 FY2021 are due to discontinued operations.

Another factor was share buybacks. The weighted-average of common shares outstanding was 39.5M, down from 45.8M a year ago. This boosted EPS growth, but the flip side is that the cash balance has gone down. It’s still $1.9B, but that’s down from the $2.7B in Q3 FY2021, immediately after the cash infusion from the I&A sale. The table below shows the numbers for Q1 FY2022.

(GAAP)	Q1 FY2022	Q4 FY2021	Q1 FY2021	QoQ	YoY
Revenue	$233.814M	$208.680M	$157.857M	12.04%	48.12%
Gross margin	66.6%	61.3%	58.1%	530bps	850bps
Operating income (loss)	$33.583M	$2.639M	($14.715M)	1172.57%	–
Income from continuing operations	$22.907M	$5.513M	($25.156M)	315.51%	–
Net income	$22.907M	($3.098M)	$13.509M	–	69.57%
EPS from continuing operations	$0.58	$0.13	($0.57)	346.15%	–
EPS	$0.58	($0.08)	$0.29	–	100.00%
(non-GAAP)
Revenue	$233.814M	$208.680M		12.04%
Gross margin	66.7%	61.4%		530bps
Operating income (loss)	$56.810M	$34.038M		66.90%
Income from continuing operations	$41.530M	$31.492M		31.87%
EPS	$1.05	$0.77		36.36%

Source: SLAB Form 8-K

Guidance calls for Q2 FY2022 revenue of $245-255M, an increase of 6.9% QoQ and 47.9% YoY at the midpoint. The forecast expects GAAP EPS of $0.37-0.47 and non-GAAP EPS of $0.85-0.95 in Q2, both much better than a year ago. On the other hand, they are a step down from where they were in Q1. While gross margins are still up YoY, they are expected to decline QoQ. Non-GAAP gross margin, for instance, is expected to be 61% in Q2, 570 basis points less than in Q1.

(GAAP)	Q2 FY2022 (guidance)	Q2 FY2021	YoY (midpoint)
Revenue	$245-255M	$169M	47.93%
Gross margin	60.9%	56.8%	410bps
EPS	$0.37-0.47	($0.41)	–
(Non-GAAP)
Revenue	$245-255M	$169M	47.93%
Gross margin	61.0%	56.9%	410bps
EPS	$0.85-0.95	$0.16	462.50%

Tailwinds are losing strength

The Q1 margins were much higher than normal because SLAB was able to count on old inventory from last year that was lower in cost. This inventory has been used up and gross margins are likely to decline due to several factors, including higher cost of goods due to foundries raising their prices. If gross margins decline, EPS is almost certain to follow as well. From the Q1 earnings call:

“the legacy cost of inventory from last year is fully fleshed out. We are and have been incurring new cash costs to build new inventory at the 2022 cost points, which are meaningfully higher than the 2021 cost point. So that’s what you’re seeing affect us here in the second quarter, and we expect those trends to continue in the third and fourth quarter.

There are some additional manufacturing cost increases forthcoming in the second half that we are already aware of. No immediate plan on price increases can never rule it out.”

A transcript of the Q1 FY2022 earnings call can be found here.

Investor takeaways

The sale of the I&A unit had several benefits. For starters, the I&A business did not grow as fast as the remaining IoT business. With the removal of I&A, SLAB was able to turbocharge the quarterly growth rates as reported. In addition, the sale brought in lots of cash, which could be used to buy back shares, further boosting EPS growth. The balance sheet got much better as well.

Sales grew in the 40% range in Q1 and guidance expects something similar in Q2. A recent presentation from SLAB suggests revenue for all of FY2022 could grow by 40%. Furthermore, the outlook for the IoT market remains very good. Bookings are strong and demand continues to outpace supply, although probably not as much as before. Earnings growth continues to surge forward, although it is likely to decelerate with costs going up.

But while earnings have gone up, the stock has gone down. The stock has underperformed in what was a difficult first half for semis, but the charts suggest a bounce is likely with support close by. The $120 price level has been an important junction for a number of years and getting past it is unlikely to come easy. The odds are in favor of the stock moving higher in the short term.

While there are arguments in favor of long SLAB, I remain neutral on SLAB as mentioned before in a previous article. The last article pointed to valuations as one obstacle and that has not gone away. It’s true valuations for SLAB have come down from where they used to be, something that argues in favor of the bulls, but that is true for all semis.

Pretty much all semis are cheaper due to the stock market selloff. SLAB is still on the expensive side in terms of multiples, especially with other semis trading at lower valuations than SLAB, despite having a better track record when it comes to growth on average. This could be an issue in today’s difficult market where buyers need more convincing before they are willing to get onboard due to the elevated risk involved.

SLAB has done better in terms of sales and earnings growth in recent quarters, but it may be too early to tell how SLAB manages to sustain its growth in the long run. SLAB previous track record is not that great, especially in comparison to what others have managed during the same period. Paying a premium for superior growth may be justified for some, but not everyone is likely to agree at this point.

While a bounce is likely in the near term, the trend also suggests SLAB is to get cheaper in the second half of 2022. The stock remains in a downtrend. There are many headwinds around that are likely to cause problems for stocks, including a weakening global economy. The current stock environment warrants taking a cautious approach, especially when it comes to stocks like SLAB with multiples on the high side.

Bottom line, SLAB has gotten a lot of work done, but more needs to be done. If SLAB continues on its current path, it’s likely to make a much stronger argument in favor of the bull case. As it stands right now, SLAB is getting there, but not quite there yet. Further observation to monitor how SLAB develops is necessary.