Silicon Labs - Quality Doesn't Come Cheap

By Stephen D. Simpson, CFA | April 30, 2010 AAA

The semiconductor business is not for the faint of heart. Lucky for Silicon Labs (Nasdaq: SLAB) shareholders, then, that they have a rather bold and skilled management team. Remember, this is a company that decided about three years ago to sell a profitable wireless business that was about one-third of the company's revenue because management foresaw increasing competition and decreasing profitability. Since that gutsy move, the company has almost completely replaced that revenue despite the recession.
IN PICTURES: Eight Ways To Survive A Market Downturn

A Very Strong Quarter In The Books
Silicon Labs reported earnings April 28 that should leave its shareholders satisfied. Revenue rose 51%, while gross margins jumped almost 6%. With significantly higher gross profits, the company was better able to leverage its overhead more effectively even while reporting higher R&D and SG&A expenses. Operating income, then, was significantly higher than in the year-ago period, and the company handily beat estimates.

Going deeper into the details, management talked about a broad-based strength across product lines. Timing products were helped by stronger networking equipment sales - something that companies like Cisco (Nasdaq: CSCO) have corroborated. Embedded mixed signal-chip sales benefited from a recovery in telecomm and industrial markets, and consumer audio was strong even though broadcast overall was not.

A Small Deal That Could Pay Off
Along with earnings, the company announced that it was acquiring Silicon Clocks, a small California semiconductor company with interesting microelectromechanical system (MEMS) technology, for $22 million. The long and short of it would appear to be this - integrating this technology could allow the company to design chips for lower-end consumer applications without sacrificing its margins. That, in turn, could have some real potential for both the top and bottom lines.

One For The Long Haul?
Silicon Labs looks to have a lot going for it. Relationships with strong consumer goods companies like Apple (Nasdaq: AAPL) and Samsung certainly won't hurt growth prospects, and a long-term commitment to R&D should leave it well-positioned to continue competing against the likes of Cypress Semiconductor (NYSE: CY), Atmel (Nasdaq: ATML), Analog Devices (NYSE: ADI) and Broadcom (Nasdaq: BRCM).

Valuation is where things get a little trickier. Analog Devices is definitely cheaper and may actually represent a pretty interesting bargain at these levels, while Atmel is an interesting turnaround idea (though it has been for many years). Still, it is difficult to argue that Silicon Labs does not deserve at least some premium for what it has already proven. While I would rather wait in hopes of getting these shares on a pullback, I would certainly be happy to hold the shares if I had them. (Check out our Industry Handbook and take an in-depth look at the various techniques that determine the value and investment quality of companies from an industry perspective.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. Fed to Play 'Kick the Can'? - Ahead of Wall Street
    Stock Analysis

    Fed to Play 'Kick the Can'? - Ahead of Wall Street

  2. All Eyes on Apple (AAPL) - Ahead of Wall Street
    Stock Analysis

    All Eyes on Apple (AAPL) - Ahead of Wall Street

  3. Get Ready To Sell Apple On This Date

    Get Ready To Sell Apple On This Date

  4. Could These Buyback Powerhouses Soar By Triple-Digits Again?

    Could These Buyback Powerhouses Soar By Triple-Digits Again?

  5. 3 Tech Stocks Immune To A Potential Tech Bubble

    3 Tech Stocks Immune To A Potential Tech Bubble

Trading Center