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Why Silicon Laboratories Stock Was Up 25% This Week

By Nicholas Rossolillo – Oct 29, 2021 at 6:42PM

Key Points

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An intrepid refocusing of the business on the Internet of Things is already paying off.

What happened

Shares of chip designer Silicon Laboratories (SLAB -0.72%) surged 25% higher this week, according to data provided by S&P Global Market Intelligence. A third-quarter 2021 earnings report that beat all expectations was responsible. Revenue grew 39% year over year to $185 million, but it was adjusted earnings per share of $0.34 -- more than double what the average Wall Street analyst was forecasting -- that really caused the stock to pop.

Someone lying on the floor using a smartphone.

Image source: Getty Images.

So what

Also in Q3, Silicon Labs completed the sale of its infrastructure and automotive segment to fellow connectivity chip designer Skyworks Solutions (SWKS -0.77%). The divestiture focuses Silicon Labs on the Internet of Things (IoT) chips for smart home devices and industrial equipment -- circuits that convert real-world "analog" signals like sound or radio waves into an electronic signal a computing chip can process. The deal with Skyworks sent $2.75 billion in cash to Silicon Labs. Management promptly returned $1.1 billion of that cash to shareholders via open market-share repurchases and a $400 million accelerated repurchase executed in Q3.  

Silicon Labs will be a smaller company going forward but one more squarely focused on WiFi, Bluetooth, and related circuitry engineering, complete with software for IoT device and network management. To accelerate this vision, the company acquired the WiFi and Bluetooth business of Redpine Signals in early 2020 for $317 million in cash.

The recent sale to Skyworks helps tidy up the balance sheet and sets up Silicon Labs as a top chip and software supplier in the IoT world. At the end September, the company had $2.73 billion in cash and short-term investments, offset by convertible debt of just $445 million.

Now what

For the final quarter of 2021, Silicon Labs is expecting revenue to be in a range of $195 million to $205 million. That represents at least a 5% sequential increase in sales over Q3. Clearly, the company's IoT wares are in high demand right now.  

Do bear in mind, though, that the semiconductor industry is a cyclical one. Revenue and resulting profit margins can fluctuate wildly due to supply and demand for Silicon Labs' customers. Nevertheless, this has been a steadily growing business for over a decade as the world becomes more digitally connected. Flush with cash, this is a top IoT stock to keep an eye on.

Nicholas Rossolillo and his clients own shares of Skyworks Solutions. The Motley Fool recommends Silicon Laboratories and Skyworks Solutions. The Motley Fool has a disclosure policy.

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