SITM - SiTime: Struggles Persist And A Hold Is Recommended

2023-07-21 04:05:13 ET

Summary

• SiTime Corporation's high p/e ratio of over 1000 and estimated p/e of 118 in 2024 suggest it is overvalued, despite impressive growth in revenues and assets over the past five years.
• The company, a leader in precision timing solutions, is expected to generate nearly $7 billion in revenues by 2027, up from $283 million in 2022, but faces challenges in maintaining operating expenses and diversifying its customer base.
• Despite the company's growth prospects, there needs to be a more reasonable valuation before an investment can be made.

Investment Summary

High growth companies often come with a higher p/e to reflect the strong growth prospects, but for SiTime Corporation ( SITM ) it seems far too high right now. The p/e sits at over 1000 as the result of some struggling couple of recent quarters. But when looking at the estimates for 2024, the p/e still sits at 118. This sort of premium is rarely worth paying for. There will likely be several years of stagnant growth for the share price to reach a somewhat realistic valuation.

SITM is a quickly growing company that offers timing solutions to electronic customers. Growth has been impressive over the last 5 years and the revenues have grown 22% CAGR and total assets 58% annually during that same period. Semiconductors companies have however seen massive hype in 2023 so far, and in years prior too. But it seems to have been the AI hype that helped many companies' share prices in the semiconductor industry rise drastically. For me, I find it too expensive to buy SITM now. Having some margin of safety is crucial, but rather than a sell rating, a hold seems fair given the growth prospects that STIM still has.

Market Report

STIM focuses on developing silicon timing systems solutions in Taiwan, Hong Kong, and the United States, but also has some other international customers. The actual product that SITM has is a resonator and clock integrated circuits and various types of oscillators too.

The actual market for precision timing seems to be growing steadily going forward, compounding at a 6.2% growth rate between 2022 and 2027. Seeing as SITM is a leader in this space they should be able to showcase at least matching growth or an outperformance. Right now it seems the market is betting on a strong outperformance as the valuation has skyrocketed. By 2027 the market size would be $8.4 billion and if SITM maintains its 85% market share then the revenue growth seems exponential. That would mean SITM is generating nearly $7 billion in revenues by 2027. Currently, it's just generating $283 million from the 2022 results.

The distribution for the industry seems very good though. With STIM being established in some of the largest markets, like North America and the Asia Pacific I don’t see them facing any significant challenges in serving these markets.

The principal growth driver for the company resides in its oscillators and clock-integrated circuits (ICs). These ICs are developed using analog and mixed-signal semiconductor technologies, encompassing low-noise circuit-based oscillators, low-noise data converters, and precision low-aging reference circuits.

These products serve as the foundation for the company's high-precision timing solutions, effectively mitigating the impact of temperature variations. Leveraging its timing solutions, the company furnishes customers with superior performance, low power consumption, compact form factors, and programmability, all packaged within a single solution. These attributes confer a competitive edge, enabling the solutions to excel in a dynamic and challenging market environment.

Quarterly Result

On August 2 2023 SITM is set to report the Q2 2023 results and expectations are high for it. Estimates are that SITM will post an EPS loss of $0.3. This would set them on route to get back to 2019 levels when the bottom line was also negative. If SITM posts a result that beats on EPS estimates I think it will catapult the share price as investors rally behind the positive results. I am however careful here as margins trending down this much is worrisome.

The previous quarter though, the Q1 report also showed that SITM is having issues handling and growing revenue. The report showed SITM experiencing a near 57% QoQ decrease. Some could say this is seasonality as companies have built up inventories already and aren't as active in making orders. But I think this difference between quarters is worrying to see. More consistency would greatly help any buy case here. We aren't far off from the next earnings report, on August 2 2023 SITM will release its Q2 results. Estimates sit at an EPS of $(0.3). This marks another move downward as the EPS has been trending this way since the middle of 2022. As I mentioned above here, I want to see more consistency in terms of revenues. They seem rather inconsistent and volatile between quarters. If SITM can maintain similar R&D expenses of $24 million but grow revenues then perhaps the share price can continue trending upwards. But it seems that if there is a miss, the downside seems quite large.

As the revenues decreased as well, the R&D expenses remained larger than the same, and selling, general, and administrative expenses increased QoQ. Going forward, proper maintenance of operating expenses will be a significant hurdle to tackle.

Risks

SiTime relies on a select few key customers to generate a substantial portion of its revenue. Failure to broaden or diversify its customer base could negatively impact its revenue growth and profitability. The potential loss of a key customer or a significant reduction in orders from them may lead to a deteriorating financial position for the company.

The CEO Rajesh Vashist shared some comments on the difficulties the company has had as well from the last earnings call, “While inventory continues to decline because of lower demand, it has not declined at the rate that we previously expected. We now forecast that customer and channel inventories will return to a normal level by the end of 20223. Second half revenue will be higher because of higher demand, though likely not of the magnitude that we previously believed”.

I find these comments to showcase why earnings might be quite volatile going forward. The semiconductor industry is cyclical and companies are building up inventories and then depleting them which fuels demand for companies like SITM.

Valuation & Wrap Up

As I have made clear in the article the valuation of SITM is far too high for what I am comfortable buying at. SITM has a massive 5-year average p/e of 397 as a result of the last few quarters seemingly showcasing a very struggling bottom line in light of softer demand. Trading far above the sector p/e of 24 makes the risks larger as when a valuation compression happens the fall is far larger. Compared to a company like Credo Technology Group Holding Ltd ( CRDO ) it showcases a similar high valuation . CRDO serves the same market as SITM and makes high-speed connectivity solutions. The margins for SITM however seem better though, with the gross margins at 63% , compared to CRDO and its 57% . Besides that, CRDO is also deeply negative in terms of its FCF margin, a negative 17%.

I think the sector has had a large run-up that has left companies with inflated valuations and that makes investment very risky. SITM is such an investment right now and buying at the levels seems to offer little potential. Rather, buying into other more reasonably valued companies is better. For investors having a position in SITM already, letting that ride seems to me like the best option and their SITM is a hold rating.

For further details see: