SITM - SiTime Corporation: May Have Broken Out After A Long Pause

2023-12-16 04:54:45 ET

Summary

• The stock has spent months consolidating prior moves, but it now appears to have broken out of its holding pattern.
• SITM has encountered a drop in demand, which shows up in recent reports, but the latest numbers suggest improvement is underway.
• SITM is expected to achieve fast growth, and thus valued accordingly, but its growth potential may be overstated due to what happened in recent years.
• There is a case in favor of long SITM, especially with the stock primed for a rally to the upside, but there is also a case against it.

SiTime Corporation (SITM), a supplier of semiconductor chips for precision timing, has been in consolidation mode after it saw its stock price collapse starting in late 2021. The stock hit bottom in October 2022, but SITM has yet to completely recover from the losses it suffered in the preceding months. The stock bounced at first after bottoming, but more recently, the stock has gone up and down and it's been essentially sideways for many months. However, there are signs that is about to change in the near future. Why will be covered next.

SITM may be getting ready for a breakout

SITM has only been around for four years as a publicly listed company, but for those few years, the stock has experienced a massive amount of volatility. The volatility was there right from the start when the stock surged 43% to $18.65 on November 21, 2019, the day of the IPO , after shares were priced at $13 a piece before going public.

The IPO was thus a success, but the stock stayed relatively muted in the months that followed. But that changed in March 2020 when the stock market went on a furious rally in the wake of unprecedented stimulus enacted in the wake of COVID-19. SITM too went along for the ride and the stock soared from a low of $15.42 in March 2020 to a high of $341.77 in December 2021, resulting in a gain of a whopping 2,116.4% in 21 months. The chart below shows how COVID-19, or the stimulus to be more exact, was a godsend for SITM.

However, what goes up must come down. The stock collapsed as soon as the year 2022 got off to a start with the Fed starting to tighten loose monetary policy after COVID-19. The decline continued until the stock bottomed at $73.10 in October 2022. SITM rebounded heading into 2023, but it has yet to return to the heady days of 2020/2021. The stock is up 15.3% YTD, but the stock has gone sideways in recent months by consolidating the moves made in the prior months.

But the sideways action may be coming to a close. Notice how in the chart above the stock has or is in the process of breaking through the upper trendline after several prior attempts were unsuccessful. For months, the stock had been in a holding pattern, caught between a descending upper trendline formed by connecting a series of lower highs and an ascending lower trendline formed by connecting a series of higher lows. This pattern appears to have been broken.

Assuming the stock has indeed broken out, the stock could possibly make it all the way back to $140-145 region where it is likely to encounter resistance. Note that the stock has stalled several times before in the $140-145 region in 2023, including in March, April and August. This repeated stalling out in the same price region indicates resistance is present in the $140-145 region.

What could support a continued rally to the upside

SITM has struggled with soft demand and excess inventories in recent quarters, which has found its way into recent quarterly results. For instance, quarterly revenue has contracted YoY in the last four quarters. In Q3 FY2023, revenue declined by 51.4% YoY to $35.5M and non-GAAP EPS fell by 93.8% YoY to $0.06. In terms of GAAP, SITM lost $18.1M or $0.81 per share. Note that the non-GAAP numbers excludes stock compensation to the tune of $19.5M and the GAAP numbers do not.

SITM finished with cash, cash equivalents and short-term investments of $568.1M. On the other hand, remember that this cash hoard will drop starting in Q4 with the recent acquisition of clock products from Aura Semiconductor, a cash transaction comprising of fixed payments of $148M and earnout payments up to a maximum of $120M. The table below shows the numbers for Q3 FY2023.

Source: SITM Form 8-K

While the Q3 FY2023 numbers were down compared to a year ago, they also represented a sequential improvement. Furthermore, Q4 guidance calls for revenue to increase 15-20% QoQ, which implies revenue of $40.8-42.6M, below last year's $61M. The forecast calls for non-GAAP EPS of $0.18-0.22 in Q4 FY2023, which is $0.14 more than in Q3 at the midpoint, but still way below the $0.64 SITM earned in Q4 FY2022. From the Q3 earnings call:

"I'd now like to provide some financial guidance, for the fourth quarter of 2023. There is still more inventory in the channel than normal, but it is being worked down. For some customers, including our largest customer, channel inventory is back to normal. But for other customers, it will take them until the end of this year or into 2024 to get back to more normalized levels.

As Rajesh mentioned, we are seeing an uptick in end demand, and we now expect fourth quarter sales will be up 15% to 20% sequentially. Whereas growth from Q2 to Q3, was essentially driven by increased sales to our largest customer, growth from Q3 to Q4, will be driven by customers, other than our largest customer, especially in the comms and enterprise, industrial and aero markets.

We expect non-GAAP gross margins, will be essentially flat with Q3, as will operating expenses. Interest income will be approximately $6.5 million. Our share count, will be approximately 22.5 million shares. As a result, we expect non-GAAP EPS, will be somewhere between $0.18 and $0.22 per share."

A transcript of the Q3 FY2023 earnings call can be found here .

SITM is projected to end FY2023 with non-GAAP EPS of $0.13 and revenue of $143M. In comparison, SITM earned $3.66 on revenue of $283.6M in FY2022, which gives you a sense of the kind of headwinds SITM has been dealing with, but the consensus is that SITM will reclaim a big chunk of what it lost. Estimates see SITM earning $0.85-1.45 on revenue of $190-200M in FY2024.

Why some may have reservations about SITM

The expectation is that SITM will see strong growth in 2024 and the stock is likely to rally in anticipation of this happening. Still, while some may be willing to play SITM accordingly, there are likely those who have some reservations about the idea of long SITM. For starters, multiples are very much on the high side for SITM.

For example, SITM has a non-GAAP P/E ratio of 206 with TTM EPS of $0.57 and a stock price of $117.21. The numbers start to look better assuming earnings grow as expected. On a forward basis, SITM trades at a still high, but more reasonable 102 times earnings, assuming SITM earns $1.15 next year. Nevertheless, even if SITM were to get back to FY2022 levels or EPS of $3.66, SITM would still trade at 32 times earnings. Multiples can be said to be at lofty levels, which may be a hurdle too high to overcome for some.

In addition, there is an argument to be made that SITM is already way past fair value. Fair value is subjective, but if we assume revenue grows at a CAGR of 12% in the next 10 years, which causes free cash flow to grow by 47% on average per year, then fair value is estimated to be around $72 with a discount rate of 12% according to the discounted cash flow method.

This is way below the current stock price of $117.21. Some might argue that revenue could grow much faster than 12% per year, which would raise fair value, but keep in mind that the CAGR for the last three years or FY2020-2023 is only 7.2%. A CAGR of 12% is possible.

Investor takeaways

SITM has shown strong growth in recent years. For example, revenue rose from $84M in FY2019 to $285M in FY2022 which represents a CAGR of about 50%. As a result of this growth in the top line, together with gross margin increasing from 47.1% to 65.1% in FY20219-2022, non-GAAP earnings went from a loss of $0.63 a share in FY2019 to a record profit of $3.66 a share in FY2022. This is pretty impressive for a company that went public in November 2019.

But this changed in FY2023 with revenue projected to end up at $143M, roughly half of what it was the year before, which means growth in FY2020-2023 has been more like 7.2% per year on average. Yet the market seems to believe FY2023 was an aberration and SITM will return to growth levels that are more like the years preceding FY2023 than FY2023 itself.

This would help explain why SITM trades at very high multiples, well into the triple digits in some instances like P/E ratios. Keep in mind multiples are at these levels even though the stock is way off the highs. SITM trades at a huge premium because of expectations for fast growth, even though there has not been much of it in recent quarters.

However, the quarterly results seem to be improving and the worst seems to have passed. Q4 guidance is calling for a 15-20% increase in revenue and a tripling in non-GAAP EPS, both QoQ. The stock, which has yet to recover most of the losses suffered after peaking in late 2021, spent most of the last several months contemplating in which direction it should be moving, but it now appears to have broken out to the upside.

An argument can be made in favor of long SITM given the above. However, there is a counterargument to be made also. The assumption is that SITM is destined for fast growth, especially in light of what it did in FY2019-2022, and the stock is assigned a high valuation accordingly, but this may not necessarily be correct.

True, there is a need for precision timing in a wide range of use cases, including such application like 5G, datacenters, automotive and aerospace. Nevertheless, it is worth mentioning that the strong growth SITM recorded in FY2019-2022, which helped the stock multiply in value by 20 times at one point, coincided with trillions of government stimulus.

This raised demand for everything, which raises the question to what extent SITM benefited from this artificial increase in demand. It is quite possible that had there not been trillions of liquidity injected into the economy, demand would be much less and SITM would not have grown as fast as it did during the COVID-19 pandemic.

In other words, SITM may not have been around long enough to make an accurate assessment of its true growth potential. The numbers in FY2019-2022 may be giving a misleading impression of what the company is actually capable of. This could be problematic for SITM since it is expected to grow like it did in FY2019-2022, which may be very difficult to attain since the circumstances that made that level of growth possible are no longer there.

I am neutral on SITM with these issues in mind. SITM comes with high valuations. If this is to be justified, SITM needs to show much faster growth than it has achieved recently. If SITM manages to get back to the level of growth seen in FY2019-2022, SITM could very well get back to the highs of late 2021. But should SITM fall short because, for instance, demand is no longer being boosted by government intervention, a repeat of what happened to the stock in 2022 is not out of the question.

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