December 2, 2021

Today’s new addition is a semiconductor company. It designs products that are the heartbeat of digital technologies. Its content is found in electric vehicles, datacenters, IoT devices, airplanes, mobile devices and more. It is benefitting from surging demand from Apple (AAPL) products, from which it generated 40% of revenue in 2020. While the market cap is a little larger than we typically look for, the opportunity warrants the exception at this time.

Company Overview

The Big Idea
When Tom Brady was throwing rockets over the middle of the field to Julian Edelman the timing of the throw was crucial.

A split second too early or too late meant an incomplete pass or interception. Or it could leave Edelman exposed to getting crushed by a defensive player.

This is just one example of how precision timing makes all the difference.

Across sports, music, stock investing, cooking, and even that all-important conversation with your significant other, timing is everything.

In the world of high tech, it’s no different. If processors are the brains of digital electrical systems, then timing solutions are the heart.

Timing solutions – oscillators, resonators and clock ICs (integrated circuits) – provide the consistent heartbeat that allows vehicles, radios, TVs, mobile devices, industrial equipment, airplanes and so much more to run smoothly and reliably.

These tiny devices provide and distribute clock signals to components like CPUs, communication and interface chips, and radio frequency components. Without accurate and durable timing components, digital technologies just won’t work. And our reliance on them is only growing.

Three main trends are responsible.

First, everything is connected and will only become more so in the future.

Second, data speeds are shooting up. 5G communications networks provide the perfect example. For these networks to work they need a greater number of very precise oscillators and timing devices.

And third, the density of electronics is increasing as more tech is squeezed into smaller packages. This is driving demand for even more resilient timing components that can handle “noisier” environments.

Within the specialized world of timing components, the trend has been away from the quartz timing devices that have been largely unchanged for decades and toward silicone MEMS (micro-electro-mechanical systems).

There are many reasons for this, starting with an ability to integrate with other circuits in standard semiconductor packages.

Beyond that MEMS and silicon-based technologies can operate in a wider range of frequencies, are more resistant to vibration, mechanical shock and temperature changes and are less susceptible to frequency jumps. Moreover, they permit higher performance, greater durability and better programmability in a smaller package.

For all these reasons and more, silicon MEMS are a disruptive force in the world of timing technologies. And there is one small company that is running the table in this specialized market with no credible competitive threat (for now).

New Recommendation and Updates

The Company
SiTime Corporation (SITM) is a fabless semiconductor company that provides MEMS (micro-electro-mechanical systems) and silicon-based timing systems. The product portfolio encompasses oscillators, clock ICs and resonators.

The company is winning business hand over fist because of its expertise designing MEMS resonators and analog mixed-signal circuits and putting the technologies together into an advanced system-level solution that solves customers’ complex timing problems.

SiTime serves over 15,000 customers in a broad array of end markets, including datacenter, automotive, aerospace, industrial and mobile/consumer electronics. The programmability of its solutions allows SiTime to design solutions quickly to meet customer specifications.

Its solutions are central to a wide variety of electronic systems around you today, including many products made by Apple (APPL), which has driven 35% to 40% of sales over the last two years.

SiTime is based in Santa Clara, CA, ships products all over the world, and has a market cap of $6 billion. It was spun out of Japan-based MegaChips (GACH.JP) in November 2019. MegaChips remains a significant shareholder (owns roughly 30% of all shares).

SiTime’s silicon MEMS is a superior technology as compared to quartz crystal for all the reasons just discussed (higher performance and programmability, lower power consumption, etc.).

Historically, most revenue came from sales of oscillator products (a roughly $4 - $5 billion market). In 2020 the company made a big leap forward with its first MEMS clock system-on-chip (SoC).

Beyond doubling the addressable market, the introduction of these advanced systems – which feature an integrated MEMS resonator, oscillator and clock integrated circuit (IC) in a single package – further differentiated SiTime’s solutions from legacy quartz systems.

Even better, SiTime’s technologies can now be manufactured at cost-effective scale in fabrication plants operated by partners Bosch and Taiwan Semiconductor Manufacturing Company (TSM).

Big picture, SiTime has been making strategic moves to position the company for a market where electronics are increasingly moving beyond controlled environments and into the great outdoors, where temperatures, interference, shocks, vibration and more are thrown at electronic systems. And it’s been working.

Platform & Products
There are three key building blocks of SiTime’s timing solutions: resonators, clock ICs and oscillators. These components may be used together or individually, depending on the performance requirements, price and size of the end product.

MEMS Resonators: Mechanical silicon structures that vibrate at a precise frequency and provide the core accuracy and stability in oscillator systems.

Clock ICs: Integrated analog mixed-signal circuits that use phase-locked loops, clock dividers, and drivers, and have multiple clock signals on the output of the system. Clock ICs require resonators and oscillators for timing references.

Oscillators: Active systems that combine resonators with analog mixed-signal ICs that cause the resonators to vibrate, generating accurate and stable clock signals.

While SiTime can sell any of these three products separately, it is the integration of the various timing components into an elegant system-level solution that meets the needs of the end customer that is the key to the company’s long-term growth.

This table from the 2020 10-K illustrates SiTime’s product portfolio by target market as of the beginning of 2021

Let’s touch on a few highlights from SiTime’s three biggest markets.

Datacenter, Networking, Communications: Timing solutions within communication infrastructure is subject to extremely demanding environmental stresses (temperature changes, mechanical shocks, vibration, etc.). With 5G there will be a step-change in performance and durability requirements, as well as the content required (i.e. number of components). This image illustrates where SiTime’s content in the market exists now and will likely exist in the future.

Datacenter, in particular, is a very strong market for SiTime. Customers are starting with a few solutions then adding more SiTime content, sometimes increasing total content by a factor of three. The new SiT9501 differential oscillator has been a massive success. Expectations of 15 design wins has turned into 30, with 50 more potential opportunities out there. Management has increased its 2022 forecast for this product by a factor of four. Suffice to say datacenter is the most stable market and management’s expected growth leader in 2022.

Automotive: Timing tech in vehicles is subject to intense environmental factors. As vehicles get more connected (data seen multiplying 1000x by 2025), and EVs and self-driving cars hit the roads, the timing requirements of the industry are getting intense. Vehicles will need up to 70 timing devices in the near term and keep time to one billionth of a second. SiTime management admitted on the Q3 2021 conference call they are surprised at just how much demand in this market is surging. The image below shows where SiTime content is needed in the auto market.

Mobile & IoT: The explosion of internet connected devices is something we began to hear about years ago, and it’s been happening. Whether it’s a smart home device, a connected appliance, a medical device, smart watch or mobile device, there’s a massive demand for small, high-performance timing devices that have long battery life. SiTime is placing content in a wide range of solutions, as seen in the following image.

Growth Initiatives
Quartz Supply Constraints Coupled with Silicon MEMS Demand Surge: Supply chains for quartz timing solutions have been messed up and this is creating opportunities for SiTime to grab market share. At the same time the performance and durability benefits of silicon MEMS is driving customers to SiTime. Management is pushing the gas pedal to the floor to keep up the momentum as it believes customers will stay with SiTime even after supply-chain disruptions are ironed out.

Fair Pricing Policy to Capture Customers: SiTime makes premium products and prices them accordingly, especially for newer solutions. In this market of tight supply, management thinks it could raise prices even more. But they’ve decided that treating customers right and capturing market share is a better strategy than price gauging to get what they can get now. Management aims to double customer count within five to seven years. I like that strategy and think it will pay dividends down the road.

Capital Equipment Investments: With demand soaring and supply chains continuing to be disrupted, SiTime is beginning to buy semiconductor manufacturing equipment that’s located on the floor of its manufacturing partners. Another good strategy.

New Solutions: SiTime launched three new products in 2020 and is doubling that number to launch six in 2022. With new solutions carrying higher ASPs this should be good for both revenue and margins.

The Business Model
SiTime is a fabless semiconductor company, so it handles design but not manufacturing. Manufacturing is handled by Bosch and TSM. Packaging, assembly and testing is handled by Advanced Semiconductor Engineering (ASE), United Test and Assembly and Carsem. Products are primarily sold to distributors and resellers worldwide. However, SiTime works closely with end customers to design solutions that meet their design requirements.

The Bottom Line
After a lackluster 2019 (revenue down 1%) SiTime grew revenue by 38% to $116.2 million in 2020. Adjusted EPS of $0.45 was up from a loss of -$0.35 in 2019. Through the first three quarters of 2021, revenue growth has taken off, rising by 63%, 107% and 93%, respectively. Adjusted EPS has soared as well.

If SiTime hits Q4 expectations (revenue up 76% to $71 million, EPS up 153% to $1.09) full-year revenue will have risen 81% to $210 million and adjusted EPS will have grown 520% to $2.79.

Looking forward to 2022, early estimates suggest another very strong year, though clearly the base business is now much larger. Management has set a floor of 30% topline growth (it thinks it can do much better) and analysts have followed suit. Current estimates call for revenue of $280 million (up 33%) and adjusted EPS of $3.43 (up 23%).

Risk
Reliance on Three Customers: In 2020, Pernas, Quantek, and Arrow accounted for 26%, 18% and 15% of sales, respectively.

Reliance on Apple (AAPL): Both Pernas and Quantek have identified Apple as a significant end customer. Based on this, SiTime believes roughly 40% of 2020 revenue was derived from Apple.

Quartz Supply-Chain Fix: If quartz supply chains are suddenly fixed, customers that could get by with that technology could switch back. This seems unlikely, especially in the near term, but as we look out later into 2022 and beyond, it’s worth being aware of.

Silicon Supply-Chain Disruptions: SiTime has excelled in generating supplies of components, but it is not immune to disruptions. COVID-19 variants could drive lockdowns, quarantines and other operational challenges.

Volatile Industry: The semiconductor industry is volatile and prone to big cyclical moves. As we move forward with SITM we’ll keep this in the back of our heads.

Recent Addition to MidCap 400 Index: SITM was just added to this index which drove above-average trading volume (almost 3 million shares on November 29). We could see a short-term lull in trading volume.

Competition
The main competition in the MEMS-based oscillator market is Microchip Technology Inc. (MCHP). In the MEMS-based resonator market it’s Murata Manufacturing Co., Ltd. In the analog mixed-signal IC and clocking market it’s Renesas Electronics Corporation, Silicon Laboratories, Texas Instruments Incorporated, Microchip Technology and Analog Devices. In the oscillator market the main quartz crystal suppliers are Rakon Limited, Daishinku Corporation, Nihon Dempa Kogyo Co., TXC Corporation, Seiko Epson Corporation, Kyocera Corporation and Microchip Technology, most of which own their own quartz manufacturing facilities.

The Stock
Trading Volume: SITM trades, on average, 325,000 shares daily (roughly $100 million). We won’t move this stock. It recently traded almost 3 million shares in one day after being added to the MidCap 400 Index.

Historical Price: SITM came public at 13 almost exactly two years ago. Shared did well initially then sold off during the pandemic. The following rally carried SITM steadily higher, until it hit 152 in February 2021. The stock then sold off and spent several months trading in the 75 to 112 range. The next big move came after the Q2 2021 report when SITM jumped from 140 to 185, then continued to rally to 240 by September 23. Since then, the stock has surged to new highs near 300, albeit with two 20% to 25% corrections (short lived) along the way.

Valuation: I am doing away with price targets because I don’t use them. In terms of valuation SITM trades at an EV/Forward Revenue multiple of 27. This is not a cheap stock and is earning a premium valuation because of the expected growth.

Buy Range: In the near term, buy between 330 (+10% from here) and 250 (-17% from here). That gives us a little room to the upside and brings us down to the 50-day line on the downside, where SITM has found support in recent pullbacks.

The Next Event: Management is expected to present Q4 2021 results in the beginning of February.

Updates on Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary
Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for January 6, 2021.