SILC - Silicom: Coming Through In The Clutch

Summary

• Silicom reported revenue above its guidance range in Q3 and guided for strong sequential revenue growth in Q4.
• Profitability was terrific in Q3 with an 18.4% operating margin and $1.01 in EPS.
• Silicom is still supply constrained with a big backlog and the potential to do even higher revenue levels next year.

Silicom ( SILC ) reported a solid Q3 revenue number and blowout earnings for the quarter. Revenue came in at $39.2 million , ahead of the analyst estimate and the guidance range of $38-39 million. EPS came in at $1.01, blowing out the $0.70 analyst estimate. This is particularly impressive with the current macro conditions and the supply chain still not back to 100%. Revenue guidance for Q4 was $43-45 million, up strongly sequentially.

Silicom is enjoying strong demand from a number of large design wins over the past 18 months. My previous article here is a summary of many of those important wins. Design wins in Silicom's target markets are very long in nature, often stretching out 3-5 years or more. This gives the company good visibility into its coming revenue stream and the company has met or beaten its guidance for 18 consecutive quarters. On a side note, the company has been continuously profitable for the past 17 years, an extraordinary feat for a small company. Demand remains strong and with an easing supply chain, bodes well for continued growth next year.

I have been writing on Silicom for years but the company has progressed in many ways and there are often new features of the story to tell. This quarter the focus was on the edge device business and on how its addressable market has expended greatly this year. These boxes were originally designed for the SD-WAN (Software Defined - Wide Area Networking) use case, where end customers use these boxes to more securely link to the Internet at lower cost than traditional telco MPLS lines. This market is growing 26% a year and should reach $5.2 billion by 2028. What the company has found over the last year is that these boxes are suitable for many more networking applications. One is SASE (Secure Access Service Edge), the hottest sub-market in cybersecurity. This market is growing at 28% per year and should $5.4 billion by 2027. Another new market is Content Delivery Networks, which is growing at 19% a year and should reach $82 billion by 2030. Other markets include telco routers and Enhanced Internet, both large markets themselves. In aggregate these new markets are many times the size of the SD-WAN market and promise years of growth for Silicom.

Given the good quarter and increased TAM, what has this meant for Silicom's stock? Currently at $43.40, the stock has a $300 million market cap with $43 million in net cash. This net cash balance should increase significantly in the quarters ahead with the company making money and drawing down prebuilt inventory. I am estimating that revenue grows 21% in 2023 to $181 million with $4.39 per share in EPS. This means the company is currently trading at 1.4x sales and 8.8x cash-adjusted P/E. This seems quite cheap for a growth company with great management and a great historical track record.

What could go wrong with a Silicom investment? End demand from its customers could slow with a global recession although it is being aided by secular growth trends described above. The supply chain situation could also worsen again which would slow sales growth although this is not expected.

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