Tuesday, Needham maintained a Buy rating on Silicon Labs (NASDAQ:SLAB) shares while reducing the price target to $120 from $150. The firm cited a more gradual than anticipated broad market recovery, with Silicon Labs' fourth-quarter guidance coming in flat quarter-over-quarter, falling short of expectations.
The analysis by Needham highlights several key points regarding Silicon Labs' current market position and future prospects. Firstly, the company has not been able to meet strong growth assumptions due to only modest improvements in bookings and persistent industrial weakness. Secondly, despite these challenges, Silicon Labs continues to secure design wins across various customers and markets.
Needham predicts that certain products, including Continuous Glucose Monitors (CGMs), Smart Meters, Electronic Shelf Labels (ESLs), and Wi-Fi 6, will drive growth for the company in 2025.
Moreover, the firm anticipates that the distributor mix for Silicon Labs will remain below 80% at least through the first half of 2025. This expectation, combined with a lower level of fixed cost absorption, has led to reduced gross margin estimates.
The distribution channel for Silicon Labs remains relatively lean, with 53 days of inventory, which is below the target of more than 70 days. Needham notes that a restock is not factored into the fourth-quarter guidance for 2024. Consequently, the firm has adjusted its estimates, pushing them out by a quarter.
The new price target of $120 is based on a 30 times multiple of Needham's lowered calendar year 2026 earnings per share estimate of $4.00, unchanged from the previous multiple applied.
In other recent news, Silicon Labs has reported robust Q2 financial results, meeting high-end revenue forecasts and exceeding earnings expectations. The company's emphasis on the Industrial & Commercial and Home business segments has resulted in a substantial number of design wins, particularly in the expanding Internet of Things (IoT) market. This has been demonstrated by its progress in the insulin management, electronic shelf label, and smart metering markets.
Silicon Labs, in collaboration with Kudelski IoT, has launched a service to expedite the market readiness of IoT devices complying with the Matter certification. The service incorporates Kudelski IoT's Matter Device Attestation Certificates into Silicon Labs' Custom Part Manufacturing Service, aiming to streamline security implementation from production to delivery, thereby reducing time and costs for manufacturers.
The company has offered a Q3 revenue outlook of $160 million to $170 million with expected sequential growth. Despite challenges in the Chinese market, Silicon Labs does not heavily rely on this region for growth. The company remains cautiously optimistic, focusing on design wins and growth opportunities in other regions.
The integration of AI and ML technologies into its product portfolios indicates a continued upward trajectory in the IoT space. These are recent developments for Silicon Labs.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Silicon Labs' financial situation, complementing Needham's analysis. The company's market capitalization stands at $3.38 billion, reflecting its current market valuation. Silicon Labs' revenue for the last twelve months as of Q3 2024 was $504.98 million, with a significant revenue decline of 47% over this period. This aligns with Needham's observations about the company's challenges in meeting growth expectations.
InvestingPro Tips highlight that Silicon Labs holds more cash than debt on its balance sheet, which could provide financial flexibility as the company navigates the gradual market recovery noted by Needham. Additionally, the company's liquid assets exceed short-term obligations, potentially offering a buffer against the current market headwinds.
However, it's important to note that analysts anticipate a sales decline in the current year, and the company is not expected to be profitable this year. This information supports Needham's decision to lower the price target while maintaining a Buy rating, as it suggests potential for future growth despite current challenges.
For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights beyond those mentioned here. In fact, there are 5 more InvestingPro Tips available for Silicon Labs, which could provide valuable context for understanding the company's market position and future prospects.
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