SiTime: Expensive And Trading Higher Than Peers (NASDAQ:SITM)

Investment Thesis

SiTime Corporation (NASDAQ:SITM) is a worthwhile enterprise within the semiconductor trade with rising revenues and money stream for the corporate to work with to additional improve its profitability and increase into totally different end-markets.

SITM is positioned for long-term progress due to the next:

1. Its income is growing, that is all the time good.

2. Its progress alternatives within the Comms & Enterprise, Automotive, and Mobile finish market place them for long-term efficiency.

3. They’re constructing extra wafer stock to battle provide chain constraints, their present edge over its friends.

Overall, SITM has quite a lot of potentials, primarily from progress drivers like 5G community driving densification in Comms & Enterprise, Advanced Driver Assistance Systems or (“ADAS”) within the Automotive, and smaller measurement with elevated performance within the Mobile finish market. However, I price it as a Hold as a result of it’s too overpriced in comparison with its friends within the trade.

Why SITM Might Be Staying For Long

SITM has quite a lot of alternatives in its finish markets. Its income has been rising about 60% for the previous few quarters with a gross margin of fifty%. Its finish markets, the Communications & Enterprise, Automotive, Industrial, and Aerospace, and Mobile, IoT, and Consumer, are arrange for long-term efficiency. I’ll clarify why every finish market is about up for long-term efficiency, its calls for, progress drivers, and its market measurement:

Communications & Enterprise

In SITM’s Communications & Enterprise finish market, they focus on making 5G community densification. They’re going to make smaller and denser cells. SITM has wonderful alternatives to enter the 5G market as effectively. The 5G market had a $48.25 billion addressable market and is anticipated to develop by $90 billion in 2022 with a Compound Annual Growth Rate of 56.7% from 2022 to 2030. This is a wonderful alternative for SITM to enhance its precision timing options since SiTime Precision Timing offers:

• Precision beneath altering temperatures

• Stability beneath vibration

• High reliability

Overall, I believe that 5G will probably be round for some time, and SITM has quite a lot of alternatives for his or her precision timing options. They can present options for information facilities, routers, and:

• Servers

• Timing Servers

• Leaf Switches

• WAN Routers

• Spine Switches

• Switches

• Storage

These are a number of the merchandise that SITM can provide to its clients. There will probably be a necessity for 5G merchandise ultimately. SITM’s precision timing options could make this a possibility for progress within the firm.

The calls for within the respective finish markets will proceed to develop due to the growing adoption of superior applied sciences. The information heart market alone had an addressable market of $206.2 billion in 2021. As I’ve mentioned, there are quite a lot of alternatives for SITM within the Comms and Enterprise with their precision timing options. They’re arrange for long-term progress on this finish market.

Automotive, Industrial, and Aerospace

SITM additionally offers options for the Automotive, Industrial, and Aerospace finish markets. They provide all kinds of merchandise that can be utilized to enhance the sensing and connectivity of business machines, medical electronics, Advanced Driver-Assistance Systems (“ADAS”), Automotive cameras, drones, and photo voltaic inverters.

The global IoT automotive market was worth $58.7 billion in 2021. It will proceed to develop because the automotive trade provides extra IoT tech to their autos, particularly sensors, Wi-Fi connectivity, and leisure. SITM is among the few corporations that produce all kinds of digital automotive merchandise. From radars, ADAS, area controllers, cameras, good mirrors, ethernet, infotainment, lidar, and extra, SITM can produce these merchandise.

Mobile, IoT, and Consumer

SITM additionally produces precision timing options for cell and wearable gadgets. Like most corporations, they’re specializing in miniaturization or making processors smaller, which suggests decrease latency (the denser the processor, the shorter the sign paths, which suggests sooner computing), making them cheaper to supply.

Although there are already quite a lot of corporations on the market that additionally produce these merchandise, it is nonetheless value mentioning that SITM has the entire bundle throughout totally different finish markets. With SiTime’s Precision Timing, they will make processors and System On Chips (“SoCs”):

• Smaller

• They can produce wearable gadgets with longer battery life

• Fabless semi-process & provide chain

The Mobile market is not presently thought of SITM’s robust swimsuit. According to Rajesh Vashist, SITM’s CEO:

Excluding our largest buyer, the cell IoT shopper phase is anticipated to be down by greater than 30% within the second half of 2022.

– SITM Q2’22 Earnings Call

SITM’s merchandise can be found to clients that want precision timing options for smartphones, styluses & tablets, headphones, good watches, Virtual Reality (“VR”), and private well being trackers. While it is true that SITM’s enterprise mannequin is setting the corporate for higher long-term efficiency, they’re performing effectively on the short-term facet of issues too:

Threat Of New Entry? SITM’s Current Advantage

Although there are quite a lot of semiconductor corporations on the market, SITM’s present benefit is provide. They have elevated their inventories by $4 million from Q1’22. I’m not saying that they are immune from any wafer/semiconductor provide chain disruptions. Instead, I believe it is good that administration took preventive measures to make sure they will cater to their clients’ calls for even when there’s one other international chip scarcity.

With their rising stock, SITM’s massive clients can really feel protected about provide points, making a win-win state of affairs for SITM and its clients if there comes a time when there are intermittent provide disruptions with wafers. Art Chadwick, SITM’s Chief Financial Officer, has this to say about their improve in stock:

But we have made a aware and strategic choice to construct some buffer stock, particularly with wafers. In case there are any disruptions within the provide chain, quite a lot of issues can occur on the planet that would affect the provision of wafers. We need to make sure that we have enough provide to deal with any intermittent disruption.

–SITM Q2’22 Earnings Call

The semiconductor trade has been affected by the worldwide chip shortages within the early years of COVID-19. There continues to be a risk of one other global chip shortage, however it’s unlikely to occur. However, if it does occur, SITM’s substantial progress in inventories will mitigate provide disruptions. Personally, I believe that it was a very good enterprise transfer for SITM to extend its inventories. Even although the potential of a provide chain disruption is unlikely, it is good that they’re taking precautionary measures simply in case it occurs.

Financial Analysis

SITM has $580.26 million in trailing twelve-month money & money equivalents, rising virtually 600% in comparison with 2020’s money & money equivalents of $73.53 million. The firm additionally has whole present property of $661 million and whole present liabilities of $44 million.

This is nice as a result of the corporate will not have liquidity issues and might shortly repay its money owed, bringing us a 15.15 present ratio. SITM additionally has $9 million in whole debt and $680 million in equity, which supplies us a 0.013 debt to equity ratio, which is nice as a result of they’re getting their funding not from lenders however equity.

SITM incorporates a robust steadiness sheet, with excessive numbers of money flowing in and comparatively low debt ranges. The firm has no liquidity issues within the foreseeable future. However, you may perceive why I price the stock as a Hold within the subsequent part.

Valuation

When in comparison with friends like Silicon Motion Technology Corporation (SIMO), Rambus Inc. (RMBS), MaxLinear, Inc. (MXL), and Canadian Solar Inc. (CSIQ), there was a time that SITM did trade at a better worth in comparison with its friends making SITM way more costly. However, the EV/EBITDA ratio is stabilizing. SITM is buying and selling virtually intently with its friends at round a 9 EV/EBITDA ratio.

Compared to its friends, SITM is doubtlessly overvalued. It has an EV/EBITDA a number of of 30-60 on common, which is a better EV/EBITDA that would signify that it is overvalued. If the corporate traded across the EV/EBITDA a number of of 15-20 (the common a number of their friends are buying and selling at), then SITM can be fairly priced.

If SITM traded round a 15-20 EV/EBITDA a number of, then I’d change my score as a Buy, however till that occurs, my score stays the identical, a Hold. The firm’s EV/EBITDA is correcting itself and may even trade at a lower cost. Still, with none important adjustments to their core operations and any bulletins from administration, I price the stock as a Hold for now.

Risks

Consumer Power

SITM presently depends on its clients and its shopper energy. A change in demand for SITM’s computing options might doubtlessly hurt the enterprise and have an effect on its core operations. A change in demand will have an effect on income, affecting the corporate’s profitability.

Supplier Power

Although I acknowledge that SITM has been build up its stock for the previous few quarters, SITM nonetheless depends upon wafer suppliers. SITM added $4 million in stock as “buffer stock” to its Q2’22 outcomes, which is a superb enterprise transfer since they will provide buyer calls for even when there is a provide chain disruption for these wafers. However, it’s value noting that that is nonetheless a threat SITM can face, particularly if the time comes once they might run out of provide in these wafers.

Taiwan and China Situation

Taiwan and China are the biggest producers of semiconductors on the planet. Even if SITM has enough stock to satisfy buyer calls for, tensions between Taiwan and China will disrupt the semiconductor financial system if the state of affairs rises. China accounts for 24% of the world’s semiconductor production, followed by Taiwan at 21%. If issues go south with each nations, it’ll have an effect on the semiconductor ecosystem and might even begin one other worldwide international chip scarcity.

Investor Takeaway

I believe SiTime Corporation is an efficient enterprise with a enterprise mannequin set for long-term efficiency. They have elevated income and money stream and have low debt ranges. They even have totally different alternatives of their numerous finish markets. SITM has an opportunity to hop on the 5G expertise, Advanced Driver-Assistance Systems (“ADAS”), and smaller and extra compact SoCs for cell gadgets development. SITM is presently way more costly and doubtlessly overvalued than its friends. I price the stock as a Hold for now and can gladly comply with the enterprise on its future bulletins.

Thank you a lot for studying. I welcome all feedback, concepts, and reactions to my articles. I recognize you and have an excellent day.