SiTime Stock: A Terrific Company (NASDAQ:SITM)

SiTime headquarters in Silicon Valley

Sundry Photography/iStock Editorial via Getty Images

SiTime (NASDAQ:SITM) is the leader in Silicon MEMS timing devices that go into a lot of electronic stuff, and the company is surfing two waves at a time:

  • The shift from Quartz to Silicon based timing devices
  • The rapid expansion of use cases and end markets

With respect to the first:

Quartz versus Silcon

SiTime IR presentation

Stuff in silicon benefits from Moore’s law, so it is continuously shrinking while adding complexity, thereby opening up new use cases and functionality which creates new markets.

This is enhanced by the fact that unlike Quartz based technology, which needs to be housed in ceramic packaging, silicon MEMS can be integrated with other circuits in standard semiconductor packages, creating more complex systems.

It’s also much more tolerant of environmental stress and can be manufactured on standard semiconductor processes.

Products

The basic building blocks are resonators, clock ICs and oscillators, and demand for these is rapidly rising:

SiTime TAM

SiTime IR presentation

These are sold in part through distributors and resellers. The company isn’t investing much in resonators anymore as the ASP for these is very low (in the order of $0.20) compared to the others (variating from $1 to $20) although they do have a new line (the XCalibur active resonator) that (Q4CC):

The Excalibur product is a new category, as I mentioned, it’s an active Resonator, so it behaves like an oscillator, but it looks and feels to the designer in pinout and so on as a Resonator, so it gives them a backup to go get Resonators for that… So I think Excalibur is going to be extremely profitable and we will start shipping this year.

At the same time, the company is increasingly producing more complex products, from the 10-K:

While simpler systems generally require only an external resonator coupled with a basic embedded oscillator circuit, more complex systems require advanced timing solutions that may integrate a variety of resonators, oscillators, and clock ICs in a single chip package. The complexity of these timing solutions increases significantly when the performance requirements of the systems that use them increase, such as electronic systems required to support the 5G communication network infrastructure.

Core solutions

SiTime IR presentation

From the 10-K:

Our all-silicon solutions are based on three fundamental areas of expertise: micro-electro-mechanical systems (“MEMS”), analog mixed-signal design capabilities, and advanced system-level integration expertise. This expertise allows us to design MEMS resonators, analog circuits, as well as systems and packaging, and put these all together to deliver a system level solution that solves customers’ complex timing problems.

And programmable solutions:

Programmable solutions

SiTime IR presentation

With the increase in more complex and sophisticated products, management also expects gross margins to expand further in the coming years. So increasingly, the company works with customers rather than just producing parts, as explained in the Q4CC:

The easy answer is that it’s a leveraged strategy. So as we know, people who semi-conduct a company that do chips for various markets, they build reference platforms that customers consume and buy according to that. So obviously a key part of the strategy is to be part of that. We have just taken it to a higher level, with a significant amount of our resources are now being spent upon that, and we have a decent size sales force that’s working on it. But all that allows us to do is not only to answer products needs for today, but go further upstream in time and get products that are going to be introduced in later years; later in ’22, later in ’23, later in ’24. So it becomes important.

New Products

The company will introduce 6 new products this year, some of which will already start contributing to revenue. One of these is XCalibur introduced at the beginning of February, which is a first in a new category of active oscillators, opening up a $200M market, from the Q4CC:

Unlike the current solutions, there is no need to do circuit matching, specialized testing, or repeated qualifications for different frequencies, which saves the customer months of development time. Additionally, Excalibur is also 10 to 20 times more reliable than existing resonators.

Market Expansion

There are several secular tailwinds here:

  • The company supplies rapidly growing markets
  • The applications in these markets are rapidly growing
  • New markets are created

We can’t be exhaustive here, but the company’s latest (February 2022) IR presentation has a number of examples here, like:

Opportunities in communications

SiTime IR presentation

Segments

Segments

SiTime 10-K

The company has more than 300 applications across six segments, or at least that’s what management said during the Q4CC. But these segments seem a little in flux as the graph is from last year’s 10-K, and the Q4CC mentions 6 segments and a somewhat different qualification but it’s perhaps best to think of it as follows (Q4CC):

the products that we develop for the coms enterprise market today are used a little bit later in automotive and a little bit later again in MIL Arrow, as well as industrial. So in other words, think of the coms enterprise market as the feeder for these other markets. On the other side, the products developed for mobile IoT are also feeders into automotive, feeders into consumer, feeders into industrial. So the second category that we’re bringing products out for is mobile IoT… the products that we develop for the coms enterprise market today are used a little bit later in automotive and a little bit later again in MIL Arrow, as well as industrial.

So technologically, the lead segments are communications and IoT, basically.

Q4 and FY2021 Results

2021 results

SiTime IR presentation

That’s, of course, a fantastic result on basically any metric, some segment info:

  • Q4 sales from the mobile IoT and consumer segment, which consists of sales into mobile phones, wearable devices, and consumer products were $41.9 million or 55% of sales.
  • Industrial, automotive, and aerospace segments were 30% of sales in Q4.
  • Communications and enterprise segment is where they put most effort and will be the main driver of growth. Revenue was $100M or 15% of sales in Q4.
  • Automotive is going to double in 2022.
  • Mobile IoT and consumer, and industrial segments are also going to grow with the slowest growth likely to be the consumer segment.

On the communication segment (Q4CC):

The growth — longer-term comes from our comps in enterprise market, we’re putting a lot of development dollars into products to address that market. As Rajesh mentioned, we’ve been talking about a SAM in that market of $500 million going to $1.3 billion in the next couple of years.

We’ve already seen that the solutions developed here trickle down to other segments. The company has so far avoided any supply issues (Q4CC):

So just to recap, our MEMS is manufactured at Bosch. It’s our process. And we have not had any issue in getting the wafers, the MEMS wafers that we need to support our revenue or our expected revenue this year. And TSMC, of course, those are the CMOS wafers that are the analog chips that our resonators get attached to. Again, as everybody knows, wafer supply is tight, but we’re a good customer of TSMC and they’ve been able to satisfy our need

Outlook

  • Management believes (helped by customers’ booking well in advance) that they can grow revenues by at least 35% in 2022.
  • Q1 revenue (seasonally weak due to the consumer segment) will see revenues at $65M (+83% y/y).
  • Q1 non-GAAP gross margin at 65%.
  • Q1 non-GAAP OpEx at $24M-$25M.

Margins

SiTime gross profit margin
Data by YCharts

The bumper 69% Q4 gross margin isn’t going to last because:

  • Some one-off orders for high-margin products.
  • The impact of TSMC’s 20% cost increase, which is going to hit mainly in Q2 as a result of the company carrying about a quarter of inventories.
  • Q2 sees the impact from TSMC raising prices by 20% which will take gross margin down 200-300bp with gross margins coming in at 60%-65% from Q2 although rising revenues and improving mix are likely to mitigate the TSMC price hike to some extent.

One might also appreciate that about half of the cost increases are passed through in pricing.

Cash

SiTime free cash flow and cash from operations
Data by YCharts

Cash flow is beginning to be substantial, and in any case, the company raised $460M during the year from two stock offerings. Mega Chips, their minority owner sold 1M shares to take their share down to under 25%.

The company had $559.5M in cash and equivalents at the end of 2021 and no debt, quite an iron balance sheet.

SiTime shares outstanding
Data by YCharts

Valuation

SiTime PE ratio, EV to EBITDA, and EV to revenues
Data by YCharts

Valuations have come down with the share price but are still a little too high for our liking in this environment.

With 20.8M shares and 2.2M options out and a market cap of $4.25B and an EV of $3.7B, the shares aren’t exactly cheap with sales this year guided at $295M producing a 12.5x EV/S.

On an earnings basis, that picture doesn’t change with this year’s EPS estimated at $3.64, rising to $4.67 next year, producing pretty hefty 51x and 40x earnings multiples.

Conclusion

The company has plenty going for it:

  • Cutting-edge capabilities
  • Rapidly expanding TAM
  • Fast revenue growth
  • Gross margin expansion on favorable product mix
  • Operational leverage
  • Iron clad balance sheet and generating considerable amounts of cash

However, the shares aren’t cheap, it’s difficult to see much valuation multiple expansion (the risk is, in fact, a valuation multiple contraction, in our view), but the combination of gradually expanding gross margins, operational leverage and increasing cash flows and perhaps buybacks could still give shareholders quite a bit of bang for their buck.

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