Silicon Laboratories Is Nearing An Important Junction (NASDAQ:SLAB)

Silicon Laboratories Inc. (NASDAQ:SLAB), a supplier of hardware and software solutions for the Internet of Things, or IoT, has been able to regain its footing after a bad start earlier in the year. The stock lost roughly a third of its value in the first quarter of 2022, but it has since stabilized, going sideways the rest of the way. However, the stock has faded recently, and it may now be in danger of falling below an important support level. This could pave the way for new lows. Why will be covered next.

Why SLAB could be in danger of losing major support

The stock has fallen 40% YTD, but that’s not the whole story. Most of the losses came early in the year. The chart below shows how the stock dropped in the first three months of 2022, only to go sideways the rest of the way. However, the trend seems to have shifted towards a more bearish one in the last couple of months, with the stock close to the low for the year. There are signs the sideways action for much of the year does not have much longer to go.

Note the trendlines in the chart above. There is a lower trendline connecting the recent lows, which is sloping down, and another one running horizontally, which is connecting the recent highs. There are lower lows, but the same cannot be said of the highs. The highs have been contained by resistance in the $150-160 region. Several attempts to break through resistance were unsuccessful.

In contrast, the lower trendline offering support is sloping down, unlike the aforementioned resistance, which is horizontal. Support is yielding ground, leading to lower lows. The lows appear to be trending down with support sloping down, unlike the aforementioned resistance. The path of least resistance would be for the stock to head lower.

It’s also worth mentioning that the stock is approaching $120 or so, which is an important long-term support level. The stock has spent most of 2021-2022 in the $120-160 region. The stock has respected the boundaries set by this region, except for late 2021/early 2022 when the stock spent a couple of months above this region.

There have been numerous instances in which the stock was in danger of falling below the $120 region. All have failed, but the stock is now close to falling below the $120 region once again. What happens next could determine the road head. If the stock bounces off of support in the $120 region as it has in the recent past, the stock is likely heading back up, possibly towards $160 and maybe even higher.

But if the stock manages to break through and fall below support at $120, then what used to be support tends to become resistance. If resistance is in place and a move north is cut off, then the stock is likely to head lower in search of the next support level, which could possibly be as low as $80 or so.

Basically, the stock has been falling, but it needs to turn it around soon. If the stock keeps declining as it has in recent weeks, the stock will break support at $120 or so, an important support level that has held for almost two years. If support is lost, the door is open for the stock to fall to new lows for the year.

Valuations may be too high in today’s environment

There is another reason why the stock could go lower. The table below show some of the multiples SLAB trades at. For instance, SLAB trades at 59 times forward earnings with a trailing P/E of 159. These are very much on the high side, but SLAB looks better in other metrics. The stock is valued at 2.6 times book value, which is in line with the sector median.

Note how market cap is much higher than SLAB’s enterprise value. This is mostly due to SLAB having roughly $1.5B in cash and short-term investments, which in turn is due to SLAB’s sale of the Infrastructure & Automotive or I&A unit to Skyworks (SWKS), a transaction valued at $2.75B in cash or $2.3B after tax.

	SLAB
Market cap	$4.21B
Enterprise value	$3.26B
Revenue (“ttm”)	$890.5M
EBITDA	$119.6M
Trailing P/E	158.74
Forward P/E	59.05
PEG ratio	N/A
P/S	5.39
P/B	2.62
EV/sales	3.66
Trailing EV/EBITDA	27.28
Forward EV/EBITDA	14.81

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Source: SeekingAlpha

Still, multiples for SLAB may be too high in today’s market where high multiples are falling out of favor with investors less willing to pay a high premium for growth due to tighter monetary conditions imposed by central banks. There is a reason after all why semis have struggled so much in 2022. Semis were one of the biggest winners from all the stimulus injected into the market. Now that some of the stimulus is being removed, it’s only natural that those who gained the most from the stimulus are also the ones with the most to lose from the withdrawal of stimulus. Semis are heading down and that alone could take SLAB down along with the rest of the sector.

Growth remains, but trouble may be lurking

However, SLAB does have its attractions. Not only is the balance sheet in good shape due to the cash hoard, but the income statement shows some pretty impressive gains. SLAB actually beat estimates for the top and the bottom line in its most recent earnings report. Q2 FY2022 revenue increased by 13% QoQ and 55% YoY to $263M.

Note that the Q2 FY2021 numbers have been stripped of contributions from the disposed I&A unit. If they are included, then revenue was actually $277M, completely changing the YoY comparisons. To avoid creating a false impression, they have been left out. The non-GAAP numbers have also been omitted for this same reason.

GAAP EPS was $0.60 and non-GAAP EPS was $1.17, both from continuing operations. Gross margins came back down from where they were in Q1, which affected the bottom line, but they were still better than a year ago. Keep in mind that margins were higher in Q1 than they normally would have been as a result of using old inventory that was cheaper in cost.

On the other hand, lots of share buybacks more than made up for it. The GAAP weighted-average of common shares outstanding fell to 36.6M in Q2 FY2022, down from 39.5M in Q1 FY2022 and 45.8M in Q2 FY2021. These buybacks boosted EPS growth, something that is expected to continue, especially with SLAB authorizing another $200M for share buybacks recently.

However, spending all that cash on buybacks reduced the amount of cash SLAB has on its balance sheet. Cash, cash equivalents and short-term investments declined to $1.5B, which is less than the $1.9B in the preceding quarter and much less than the $2.7B SLAB had in Q3 FY2021 after the I&A sale. SLAB has greatly reduced the number of shares outstanding in recent quarters, but it also cost quite a bit. The table below shows the numbers for Q2 FY2022.

(GAAP)	Q2 FY2022	Q1 FY2022	Q2 FY2021	QoQ	YoY
Revenue	$263.150M	$233.814M	$169.492M	12.55%	55.26%
Gross margin	62.3%	66.6%	56.8%	(430bps)	550bps
Operating income (loss)	$31.379M	$33.583M	($11.487M)	(6.56%)	–
Income from continuing operations	$22.135M	$22.907M	($18.491M)	(3.37%)	–
Net income	$22.135M	$22.907M	$19.932M	(3.37%)	11.05%
EPS from continuing operations	$0.60	$0.58	($0.41)	3.45%	–
EPS	$0.60	$0.58	$0.44	3.45%	36.36%
(non-GAAP)
Revenue	$263.150M	$233.814M		12.55%
Gross margin	62.4%	66.7%		(430bps)
Operating income (loss)	$54.610M	$56.810M		(3.87%)
Income from continuing operations	$42.763M	$41.530M		2.97%
EPS	$1.17	$1.05		11.43%

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Source: SLAB Form 8-K

Guidance calls for Q3 FY2022 revenue of $265-275M, an increase of 46% YoY at the midpoints. The forecast also sees GAAP EPS of $0.49-0.59, up from a loss of $0.45 one year ago, and non-GAAP EPS of $1.08-1.18, an increase of 232% YoY at the midpoint.

(GAAP)	Q3 FY2022 (guidance)	Q3 FY2021	YoY (midpoint)
Revenue	$265-275M	$185M	45.95%
Gross margin	60.0%	59.2%	80bps
EPS	$0.49-0.59	($0.45)	–
(Non-GAAP)
Revenue	$265-275M	$185M	45.95%
Gross margin	60.5%	59.4%	110bps
EPS	$1.08-1.18	$0.34	232.35%

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Management remains optimistic about the outlook, especially with SLAB having already scored more design wins this year than it did in all of last year. However, there are signs of potential stress in the market that could snowball into something more serious. Booking patterns are in a state of flux with some weeks stronger and other weeks weaker in terms of new bookings. Order cancellations are few, but more customers are requesting rescheduling of delivery. From the Q2 earnings call:

“The demand environment continues to be strong, and our demand remains above our ability to fully supply it. That said, we are seeing more volatility in our recent bookings patterns, with more variation on a week-to-week basis combined with higher levels of customer reschedules. We have not seen a large uptick in order cancellations.

We believe the broad-based nature of our customer footprint combined with our significant industrial exposure offers greater stability to macro weakness than more heavily consumer-oriented semiconductor operations.”

A transcript of the Q2 FY2022 earnings call can be found here.

Investor takeaways

I am neutral on SLAB as stated before in a previous article. That article from early July concluded that the stock was likely to rally in the short term, only to resume its decline afterwards. The recent price action suggest this scenario is about to come to fruition. The stock has given back all the gains at the start of the second half. It is now in position to break through $120 or so, a key support level that has held for the last two years.

SLAB is still seeing strong growth as a pure play on IoT, but there are some signs demand is starting to waver. Customers are asking to reschedule, which could be a harbinger of worse things to come. SLAB is facing a host of headwinds that are likely to put downward pressure on growth, including a faltering global economy.

Semis have sold off in 2022 and SLAB is not an exception. The selloff happened in spite of massive spending on stock buybacks, which begs the question what will happen when there are fewer buybacks to support the price of the stock, something that must happen eventually. The fact that the stock is pricey in terms of a number of closely watched metrics does not help.

Bottom line, there are some things to like about SLAB, but they are outnumbered by things not to like. High multiples and a possible slowing down in growth are among the latter. But the fact that the stock is looking tired should give people pause. The stock looks like it wants to break support and set new lows. With this being the case, keeping your distance is the way to go.