Semiconductor company SiTime (NASDAQ:SITM) launched an IPO last week which has debuted to a strong start. The company had initially priced its IPO at $13, the lower end of its initial price range, and raised just over $56 million according to Renaissance Capital. But the company surged in value to reach a high of over $19 on the first day of trading, though it has steadily declined since to finish at $17.01 as of the close of trading Monday. Underwriters for this IPO include Barclays and Stifel (NYSE:SF).
That SiTime’s IPO has been so successful may seem surprising at first, as this stock has some massive financial alarm bells which may cause investors to scurry away. But despite these red flags, the stock is very cheap for an IPO and it has the potential to turn things around. This small, struggling company might be one of the better surprising IPOs in the long term.
Turning Things Around
The typical IPO is a high growth yet unprofitable company which promises profits at some point in the future, possibly by dialing back on marketing or other expenses when the time is right. Other times, you will see steadily growing companies which are profitable that promise reliability as they go public.
SiTime by contrast is a company going public even though its revenue is decreasing. As noted in its SEC filing, the company reported a revenue of $101 million in 2017 and yet just $85 million in $2018, a decrease of 16%. Revenue decreased by a further 10% in the first three quarters of 2019 compared to 2018. SiTime does not have a strong excuse for this decline, simply noting that it happened as customers moved towards other suppliers.
If that was not bad enough, SiTime’s profitability numbers have also been problematic. While it recorded a net profit in 2017, the company has been unprofitable ever since, with a loss of $7.2 million in the 2019 first three quarters. Gross margins also declined from 47% in 2017 to 42% in 2018, though they did rise back to 47% in 2019.
So why would investors ever consider dealing with such a company whose financial results range from mixed to bad? Because there are reasons to believe that SiTime can turn things around. First, SiTime is starting to trend in a positive direction with the revenue decrease rate shrinking and its margins rising as noted above. But more important is the company’s ability to secure a niche with its interesting products.
Timing and Valuation
SiTime is a semiconductor and silicon company which states that it helps create timing solutions for businesses like Dermani Medspa. Timing solutions help ensure that electronic devices run reliably and aims to replace quartz which has been the timing material of choice for decades. SiTime lists 5G networks as an example of growing electronics technology which will require higher precision with more oscillators.
SiTime lists competitors including MCHP (NASDAQ:MCHP) and Texas Instruments (NASDAQ:TXN) among its competitors, but also declares that “we are the only semiconductor company focused entirely on all aspects of timing technology” and that its focus on silicon technology gives it a unique niche.
It should be noted that the semiconductor industry has struggled in 2019, with the Semiconductor Industry Association predicting a 12.1% decrease in sales in 2019. This decrease is caused by a weaker pricing market as well as ongoing disputes between the United States and China.
But as prices stabilize and 5G’s rise fuels demand for semiconductors, the industry could turn things around in 2020 and beyond. And as discussed above, SiTime in particular could benefit from increased 5G components demand.
Finally, it should be noted that its problematic financial numbers mean that SiTime is a cheap company at its current price. The company as detailed in its SEC report had $9.2 million in cash and $46 million in debt. With a market cap of $240 million at $17 per share, we are looking at an enterprise value of about $280 million. With a revenue of $55 million for the first three months of 2019, we can reasonably expect an EV/revenue ratio of less than four. This is comparable and in fact cheaper than other companies such as MCHP which sits at 6.
A Potential Improvement and Buy
SiTime is not your typical IPO, and investors may choose to avoid a company which is not profitable and whose numbers have been trending in the wrong direction. But on the other hand, there are reasons to believe that this company and the semiconductor industry can bounce back in 2020, and SiTime’s focus on timing solutions gives it a niche and the hope that it can turn things around.
At $17, this is not a very expensive stock relative to competitors and so this could be a good buy low situation. Investors may choose to wait to see if the semiconductor industry really improves or if SiTime can improve its numbers. But this seemingly disappointing stock could be a solid get at its present price to hold over the long term.