SILICON LABORATORIES INC SLAB
January 14, 2014 - 1:32pm EST by
surf1680
2014 2015
Price: 43.00 EPS $1.37 $2.00
Shares Out. (in M): 42 P/E 30.0x 20.0x
Market Cap (in $M): 1,800 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 75 0
TEV ($): 1,760 TEV/EBIT 0.0x 0.0x

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  • Internet of Things (IoT)
  • Growth stock

Description

David Pogue loves his Nest thermostat.  Nest won multiple design awards and products like this have the potential to save households all around the world a few pennies a day.  It is the crown product of the “Internet of Things” movement.  Google just bought Nest for $3.2 Billion so they can mine data and target advertisements based on our ambient temperature (sweaters or tank tops, thongs or boots).  A lot of companies are now thinking of ways to put their toaster ovens and cat-doors on the internet.  If you take apart a Nest thermostat and you’ll find chips from TI ($47 billion market cap), Micron ($25 billion market cap), Samsung ($181 billion market cap) and a Zigbee network chip made by SLAB (a paltry $1.8 billion market cap). 

 

Because of this “Internet of Things” movement, Zigbee has suddenly become an important networking technology.  SLAB was a “first-mover” in this space and offers the nicest solutions for handling Zigbee networking tasks.  Other than being a leader in this suddenly-relevant networking technology, SLAB has a diverse range of boring legacy product lines making mixed signal processors for everything from TVs to car radios. It has made inroads in a variety of products over the years, most recently in the tuners for flat screen televisions.  The market appears to be focusing on the slow decline of these product lines instead of the potential of this new market.   That is changing with Google’s acquisition and this years “internet of things” hype at the CES show.  The value proposition here is simply that SLAB is trading at the lowest multiple of profitability that it has ever traded, yet it is a leader in a field that is potentially the biggest market that it has ever participated.   They are positioning themselves as the QUALCOM of the “Internet of Things.”   

 

Value Perspective #1:  While it bothered me at first that SLAB has been so acquisitive, averaging 2 per year, the key IOT-related acquisition in May of 2012, EMBER, is looking like a transformational homerun.  Ember was started by MIT graduates in 2001 to make a wireless network of sensors.  Bob Metcalfe, inventor of the Ethernet, was a board member.  Over the years, Ember raised $89 million in capital from venture capitalist to fund their R&D and their product line. SLAB purchased Ember and all their patents for $71 million before all the IOT hype.

 

Value Perspective #2:  SLAB is profitable and has ample cashflow but they don't show a lot of earnings.  They’re spending over $3+/share on R&D - really an investment in the future.  They’re using R&D funds to create patents and new product designs.  If you buy into the “internet of things” proposition then you may want to capitalize this R&D investment, which after some depreciation would allow some of that R&D to flow to the bottom line.  SLAB is covered by a variety of analysts who publish near term models on their profitability expectations.

 

Value Perspective #3:  Maintain their market share.  Inspired by Body Shop…   Gartner says the Internet of Things will be a $300 Billion market by the year 2020.  Cisco says it will be a $13 trillion dollar market.  Because of their Zigbee radios, SLAB currently has a 20% share of the current IOT market.  When industry analysts post potential market-size numbers like these I do not understand if that’s retail, wholesale, or just pure fiction all around.  Regardless, if SLAB can get 1 of their radios in 1/5 of all IOT devices (as they are doing right now) and IOT turns out to be a big market, then this will turn out to be a monumental investment.  

 

There are tremendous risks involved in this, but there is tremendous upside.  SLAB has a history of getting in and out of different product lines.  Today SLAB will do an investor meeting where I imagine they will talk about their share of the “Internet of Things.”
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

"Internet of Things" Hype!
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