2023-07-21 08:21:30 ET
Summary
- SLAB is scheduled to release the Q2 report on July 26, which could cause the stock to rally or collapse like the two reports that preceded it.
- SLAB is facing headwinds, particularly on the consumer side, and recent reports from industry heavyweights suggest it is time to buckle up.
- Multiples for SLAB are higher than most in the sector, which could become an issue if growth is flat to down.
- Recent earnings releases from SLAB have been accompanied with great volatility, so proceed with caution with the Q2 report coming up.
Silicon Laboratories ( SLAB ), a supplier of hardware and software solutions for the Internet of Things or IoT, is scheduled to release its Q2 report on July 26. The stock has set aside recent headwinds to rally in anticipation of an upcoming report that will hopefully be different compared to the previous one, which fell short of expectations and caused the stock to drop. Instead, the market is looking for something more like the report that preceded the previous one, which caused the stock to rally by blowing past expectations. However, while a repeat of either outcome is possible, the former might have the edge if industry heavyweights are any indication. Why will be covered next.
What to expect from SLAB
SLAB is scheduled to release its Q2 FY2023 report on July 26. Earnings expectations have been all over the place with roughly as many earnings upgrades as downgrades, but the consensus with a week to go is that non-GAAP EPS will come in at $1.03 on revenue of $243M, both down YoY. This is in line with the midpoint of guidance from SLAB, as shown below.
(GAAP) | Q2 FY2023 (guidance) | Q2 FY2022 | YoY (midpoint) |
Revenue | $238-248M | $263M | (7.60%) |
Gross margin | 60.0% | 62.3% | (230bps) |
EPS | $0.35-0.45 | $0.60 | (33.33%) |
(Non-GAAP) | |||
Revenue | $238-248M | $263M | (7.60%) |
Gross margin | 60.0-61.0% | 62.4% | (190bps) |
EPS | $0.98-1.08 | $1.17 | (11.97%) |
Source: SLAB Form 8-K
The table below shows the quarterly results in previous quarters for comparison. Note how SLAB has been able to give EPS a lift with stock buybacks. For instance, non-GAAP net income declined YoY in Q1 FY2023, but it increased on a per share basis thanks to a 14.6% reduction in the share count.
(Unit: $1000, except for EPS, margins and shares) | |||||
(GAAP) | Q1 FY2023 | Q4 FY2022 | Q1 FY2022 | QoQ | YoY |
Revenue | 246,787 | 257,325 | 233,814 | (4.10%) | 5.55% |
Gross margin | 62.3% | 61.1% | 66.6% | 120bps | (430bps) |
Operating income | 19,573 | 24,075 | 33,583 | (18.70%) | (41.72%) |
Net income | 13,967 | 25,361 | 22,907 | (44.93%) | (39.03%) |
EPS | 0.41 | 0.76 | 0.58 | (46.05%) | (29.31%) |
Weighted-average number of shares | 33,753K | 33,265K | 39,523K | 1.47% | (14.60%) |
(non-GAAP) | |||||
Revenue | 246,787 | 257,325 | 233,814 | (4.10%) | 5.55% |
Gross margin | 62.5% | 61.3% | 66.7% | (120bps) | (420bps) |
Operating income | 47,433 | 48,709 | 56,810 | (2.62%) | (16.51%) |
Net income | 37,637 | 43,534 | 41,530 | (13.55%) | (9.37%) |
EPS | 1.12 | 1.31 | 1.05 | (14.50%) | 6.67% |
Weighted-average number of shares | 33,753K | 33,265K | 39,523K | 1.47% | (14.60%) |
On the other hand, stock buybacks have affected the balance sheet. Cash and cash equivalents reached $2,726M in Q3 FY2021 after the cash infusion from the sale of the I&A unit for $2.7B or $2.3B after taxes. But the balance has gradually fallen with all the stock buybacks, and it now stands at $1,152M as of Q1 FY2023.
What also stood out was the rise in inventories on the balance sheet, which could be seen as a reflection of soft demand. Inventory has increased in five consecutive quarters, from $49.3M in Q4 FY2021 to $133.2M in Q1 FY2023. Combine this with guidance calling for the third consecutive decline in quarterly revenue, and it is clear demand for products from SLAB is under pressure.
SLAB itself has acknowledged demand is soft, particularly on the consumer side. While SLAB believes it has a shot at outperforming during tough times, it also leaves open the possibility the bottom has yet to be reached and the recent trend of declining sales could continue. From the Q1 FY2023 earnings call:
"On the overall dynamics, the consumer piece is tough to call, right? There's a lot of uncertainty and volatility out there on the consumer side, so definitely not calling the bottom or anything like that. I think what we have confidence in is that design win momentum we've been consistent about and the share gains we've been consistent about. We have a lot of ramps coming in the second-half of the year.
So what the consumer piece will be is difficult to see right now, but what we know is on top of that, whatever that ends up being, we have those ramps and those design wins and share gains that should position us to do better than whatever the end market ends up being."
A transcript of the Q1 FY2023 earnings call can be found here .
In light of the uncertainty, SLAB would not get into what to expect out of the second half of the year, but a review of estimates from Wall Street analysts suggests SLAB will finish with non-GAAP EPS of $3.98-4.66 on revenue of $992-1,030M by the end of FY2023. In comparison, SLAB earned $4.74 on revenue of $1,024.1M in FY2022. This implies a second half that is flat to slightly up compared to the first half, although down compared to a year ago.
Could SLAB surprise once more?
The next earnings call could shed some light on the state of demand. The market seems to be leaning towards an improvement, but a deterioration is not out of the question. It's probably worth mentioning that SLAB has been able to blow past earnings estimates, including in three of the last four earnings reports. For instance, SLAB earned $1.31 in the Q4 FY2022 report, or $0.33 more than expected. In addition, non-GAAP guidance of $1.07-1.17 per share was as much as $0.35 higher than the consensus at the midpoint.
As a result, the stock jumped by 14% in early February, as shown in the chart below. On the other hand, the chart also shows how the stock fell in April after SLAB disappointed with its Q2 FY2023 guidance. The stock has since recouped its losses, and it is back to where it was before the most recent guidance, but the stock has been very volatile in each of the last two earnings releases, so it might happen again on July 26. Bulls and bears alike may want to head into the earnings call with caution. The stock has gained 20.2% YTD.
It's also worth mentioning that multiples are fairly high for a stock that is expected to see earnings stay rather flattish. In general, multiples are significantly higher compared to most semis. For instance, SLAB trades at 38 times forward non-GAAP earnings with a trailing P/E of 34.5. In comparison, the median in the sector is 24.5x and 19.7x respectively. Keep in mind that this is for non-GAAP, which excludes things like stock-compensation expense. In terms of GAAP, which does include this expense, the gap is even wider.
SLAB | |
Market cap | $5.47B |
Enterprise value | $4.85B |
Revenue ("ttm") | $1,037.1M |
EBITDA | $159.1M |
Trailing non-GAAP P/E | 34.53 |
Forward non-GAAP P/E | 37.95 |
Trailing GAAP P/E | 69.70 |
Forward GAAP P/E | 100.07 |
PEG ratio | - |
P/S | 5.38 |
P/B | 3.74 |
EV/sales | 4.67 |
Trailing EV/EBITDA | 30.46 |
Forward EV/EBITDA | 23.98 |
Source: SeekingAlpha
What other semis are suggesting could happen
It's worth listening to what other semis are saying to get an idea as to how to proceed with SLAB. A number of high-profile semiconductor companies have already reported their latest results and the numbers so far have been pretty disappointing to say the least. The list includes Micron ( MU ), Samsung ( SSNLF ) and TSMC ( TSM ). The last one issued soft guidance early on July 20. TSM also lowered its outlook for the year by predicting a revenue decline of around 10% YoY, more than previously predicted.
All these companies are suggesting semiconductor demand remains weak on the consumer side. This does not bode well for SLAB, since it is a company that has a large exposure to the consumer. It's not impossible for SLAB to buck the trend, but in light of what the heavyweights had to say, the odds are probably in favor of SLAB falling short of expectations.
Will demand in China recover?
Another issue that could receive further clarification in the upcoming report is China. SLAB has seen sales in China as a share of total revenue drop from the mid-twenties to the mid-teens. Nevertheless, SLAB was optimistic China would improve in the previous earnings call. Even so, recent reports from the likes of TSM don't give rise to optimism when it comes to China. On the contrary, they have not seen the kind of increase in demand from China as SLAB seems to be counting on. This does not mean SLAB is destined to experience what others are experiencing, but it certainly provides clues as to what is more likely to happen than not.
Investor takeaways
A previous article from late last year raised the possibility that even though the stock was benefiting from a Fed pivot towards less tightening of monetary policy, the stock might not have reached bottom just yet due to a combination of declining earnings and relatively high valuations.
While the stock has appreciated since then in line with the S&P500, it has not really changed the overall trajectory of the stock. The stock closed at $163.07 on July 19, which is not far from $163.43, the February 2021 high. In other words, the stock has gone most sideways all this time, with rallies followed by selloffs and vice versa.
SLAB managed to spike higher on two occasions in October 2021 and February 2023, but the stock proceeded to give it all back on both occasions. Keep in mind that this sideways action has occurred despite SLAB spending a large part of its cash hoard on stock buybacks. One could speculate as to how much worse the stock would have performed without the benefit of stock buybacks.
The latest flip-flop occurred earlier this year, when a rally in the stock in February was offset by a selloff in April. The former was due to an earnings report that surprised to the upside, and the latter was due to a report that did the opposite. Another earnings report is due in a week, which has the potential to move the stock, similar to how the two preceding reports triggered a rally and a selloff.
Current expectations call for a flattish end to the year. So not much of an improvement in earnings, but no further deterioration either. However, a surprise should not be ruled out after the last two reports came in rather different to what was expected. Bulls and bears alike should proceed with caution with the next report, as one could easily get caught betting on the wrong side of the trade.
With this in mind, being neutral seems most appropriate given the circumstances. It also makes sense with the stock not having gained all that much since early 2021 with mostly sideways action. Multiples also seems to be on the high side, considering the lack of growth. The risk is to the downside. Act accordingly.
For further details see:
Silicon Laboratories: Upcoming Report Could Shake Up Things Once More