Insights

Why SiTime Shares Are Falling Today

What happened

Semiconductor manufacturer SiTime (NASDAQ: SITM) delivered a quarter that met analyst expectations, but the company walked back its previous forecast for oversize growth in 2022. Investors were not pleased, sending SiTime shares down more than 35% on Thursday morning.

So what

SiTime makes digital timing devices, offering more precision and greater durability than the quartz-based products that have been used for the last century. Its an obscure but surprisingly important niche: Timing devices are needed in a range of electronics products and other goods, including automobiles, cellular towers, and data centers.

On Wednesday evening, SiTime reported second-quarter earnings of $1.11 per share on revenue of $79.4 million, in line with to slightly ahead of estimates. But the company also warned that it now believes it has been too optimistic when talking about full-year growth.

In May, SiTime raised its estimate for full-year revenue growth from 35% to 50%, but the company now believes that the 35% forecast is more appropriate.

In a post-earnings call, CEO Rajesh Vashist said, “In May, we did not anticipate the subsequent conditions, financial downturn, supply chain disruptions, and political turmoil, all of which made it difficult for our customers to see the magnitude and the speed of decline in their own business.”

Vashist said Internet-of-Things (IoT) customers are particularly gun-shy, saying that excluding SiTime’s largest customer, he now expects IoT segment revenue to be down more than 30% year over year in the second half.

Now what

It’s worth noting that 35% growth in a volatile market is nothing to be ashamed of, and Vashist reiterated SiTime’s long-term forecast for annual growth north of 30% for years to come at a gross margin of more than 65%, as SiTime continues to penetrate a $4 billion addressable market.

The real issue is that a lot of this growth was priced into SiTime shares heading into earnings. Even after Thursday’s sharp decline, the stock still trades at 68 times earnings and 11 times sales. Heading into earnings, the stock was valued at more than 100 times earnings.

When you are priced for perfection, the market tends to look unfavorably on anything short of that. For long-term investors, SiTime remains an intriguing investment opportunity, but today, investors are getting a reminder of how volatile growth stocks can be in the near term.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends SiTime Corporation. The Motley Fool has a disclosure policy.

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