SITM - SiTime: A High-Growth Technology Story In The Time Space

2023-04-25 05:18:33 ET

Summary

• SiTime is a high-growth technology story in the time arena offering unique timing solutions to its customers.
• The company's top-line and bottom-line are expected to grow significantly in the next five years driven by product enhancements and new product launches.
• Long-term growth-focused investors can buy the company's shares around the current price.

SiTime Corporation ( SITM ) is a high-growth tech story that offers timing solutions to its electronic customers. In the last five years the company's revenue has grown at a CAGR of 22.91%, which is really impressive. I expect revenue will grow at a CAGR of around 12% in the next five years driven by its highly innovative oscillators, clock ICs, and MEMS resonators. Net income for the company will also grow meaningfully driven by new product launches and stringent cost control measures. Long-term investors can buy the company's shares around the current price.

SiTime offers its customers precision timing solutions. The global electronics industry uses its timing chips. These chips provide the timing functionality to electronic systems which is required for the smooth running of these systems. The company's products are used in various end markets, such as communications and enterprise, aerospace, mobile, automotive, industrial, Internet of Things ("IoT"), and consumer.

Growth Drivers

Oscillators and Clock ICs

The company's major growth driver is its oscillators and clock ICs. These ICs are made based on analog and mixed-signal semiconductor products, which include low-noise circuit-based oscillators, low-noise data converters, and precision low-aging reference circuits. These products constitute the company's high precision timing solutions and stabilize them despite rapid temperature changes. The company's timing solutions offer its customers high performance, low-power, small-size and programmability at the same package, which are the reasons these solutions perform well in the competitive environment. According to a report :

Semiconductor Timing IC Market was valued at USD 7.17 Billion in 2019 and is projected to reach USD 11.21 Billion by 2027, growing at a CAGR of 6.2% from 2020 to 2027.

Given the growth outlook of timing ICs and the company's competitive edge in providing such solutions, as mentioned above, the company's long-term revenue growth is expected to remain strong from these products.

MEMS Resonators

The company's another growth driver is its MEMS (micro-electromechanical systems) resonator products. MEMS resonators are rapidly replacing conventional quartz resonators, since MEMS resonators can be miniaturized to better address form-factor related challenges. The company pioneered the silicon MEMS timing industry with such products, including processes and technologies. These processes and technologies help the company improve resonator stability, boost quality and reliability, and decrease aging effects. As a result, these products beat competitor products by a significant margin. In addition, the MEMS resonator products can be used to diversify the company's timing solutions with their integration into its oscillators and clock ICs. These are the reasons, I believe, the company's MEMS resonators will boost the company's long-term revenue growth.

Competition

SiTime conducts its business in a highly competitive environment. SiTime's competitors include Microchip Technology ( MCHP ), Skyworks Solutions ( SWKS ), Texas Instruments ( TXN ), Kyocera Corporation ( KYOCY ), Seiko Epson Corporation ( SEKEF ), Daishinku Corporation, and TXC Corporation. The company competes on the basis of supplying high quality and differentiated products, high frequency of introducing new products, and price.

One of SiTime's strongest competitive advantages is that its timing solutions not only replace existing products available in the market by offering improved performance, but also enable new electronic applications to work better by offering performance boost at a lower price. The company's intention to drive innovation is expected to enable its customers to develop new reference architectures and purchase complete solutions created by SiTime. As a result, the company's future revenue growth is expected to remain strong. The company's another competitive advantage is that it continues to make investments in its digital marketing strategies for engaging customer experience. The company's unique market segmentation efforts help it acquire new customers to whom it can deliver its differentiated timing solutions. These initiatives help the company grow long-term revenue in a consistent manner.

Fourth Quarter 2022 Financial Results

SiTime's fourth quarter 2022 net revenue came in at $60.8 million, a year-over-year decrease of 19.7%. Net revenue for the full year of 2022 was $283.6 million, a year-over-year increase of 29.6%. The company's non-GAAP net income for the quarter was $14.4 million, or $0.64 per diluted share, compared to a non-GAAP net income of $29.2 million, or $1.32 per diluted share in the year-ago period.

Although the company delivered an unimpressive financial result for the fourth quarter of 2022, for the full year of 2022 the result was impressive. The company introduced four new products during the course of the quarter and are on track to introduce five more in 2023. As a result, I expect, the company will deliver strong revenue and profitability growth in the forthcoming quarters of 2023. I expect revenue and profitability growth will also come from the company's funnel and design wins going forward, which grew 55% in the fourth quarter of 2022 compared to the year-ago period.

The company's ASPs are continuing to grow, and the company expects it will remain on the higher side in 2023 compared to 2022. This is an indication the company is providing value to its customers. The company said :

As in the past few years, we are not seeing any meaningful loss of business to competitors even though their availability has increased and lead times have shortened. We attribute this to the highly differentiated nature of our products.

The company's highly differentiated products and timely introduction of new products are expected to result in significant visibility in top-line and bottom-line growth for the next couple of years.

I expect the company's first quarter 2023 revenue will stay in the range of $55 million to $75 million, driven by the effects of new product launches and design wins. The company's non-GAAP EPS is expected to remain in the range of $0.60 and $0.80, driven by stringent cost control measures. I expect it is a good time to buy the company's shares gradually before first quarter 2023 earnings, since I feel a beat is in the cards.

Valuation

SiTime's peer group companies include Microchip Technology, Skyworks Solutions, Texas Instruments, MaxLinear ( MXL ), and Ambarella ( AMBA ).

(Data Source: Seeking Alpha )

SiTime is expensively valued compared to its peer group companies. The company has a strong balance sheet consisting of cash and equivalents of $34.6 million, and total debt of $10.6 million. The company is expensively valued because it is a high-growth company. In the last five years, the company's revenue has grown at a CAGR of 22.91%, and I expect revenue will grow at a CAGR of around 12% in the next five years driven by strong demand for its highly differentiated timing solutions. Revenue is not expected to grow at a CAGR of 20-22% since the company has no longer a low base effect, and it is maturing. The company's MEMS-based timing solutions instead of quartz are driving its long-term revenue growth. The company is a niche player in the timing field, and has significant product differentiation, and it offers a variety of products to its customers, due to which it is expected to have a strong revenue growth in the years to come. Long-term investors can buy the company's shares around the current price.

As I said, SiTime's revenue has grown at a CAGR of 22.91% in the last five years. Assuming that revenue will grow at a CAGR of 12% in the next five years, I will find out the company's long-term (five-year) share price. The company's trailing 12-month revenue is $283.60 million, and at a CAGR of 12% its beginning-2028 revenue will be $499.90 million, or $23.04 per share. In the last one year the company's shares have traded between the price to sales multiples of 5x and 20x, and I believe in the next five years the company's shares will touch a price to sales multiple of 12x at the higher side, driven by its growth drivers mentioned above. Applying a price to sales multiple of 12x on the company's beginning-2028 expected revenue per share, I get the company's beginning-2028 share price as $276.48.

Risks

SiTime depends on a limited number of key customers for generating a significant portion of its revenue. If the company is unable to expand or diversify its customer base, its revenue growth and profitability could suffer. The loss of one or few key customers, or a significant reduction in orders from key customers could result in worsening financial condition for the company.

The company sells its products mainly through distributors. The company usually is not involved in any long-term or minimum purchase commitments from them or their end customers. The company's sales are made on a purchase order basis, which may be cancelled or reduced anytime without any notice. This could result in significant fluctuation in its revenue and operating results.

Conclusion

The company's aim is becoming the leader in the time semiconductor game by providing its customers differentiated products. The company is a fabless semiconductor company offering its customers an array of time related microchips, which include oscillators, clock ICs, and MEMS resonators. These products enjoy strong demand in the electronics and computing marketplace. I believe the company's shares can be bought around the current price for the long term.

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