Shares of Silicon Laboratories (SLAB -3.32%) finished 2021 up 62%, which more than doubled the gains from the broader market measured by the S&P 500 index. Most of the stock's return came after the release of the third-quarter earnings report in late October.
On top of strong earnings results, Silicon Labs completed some shareholder-friendly moves last year to unlock more value for shareholders, including a share repurchase and the sale of its automotive business to Skyworks Solutions, which makes Silicon Labs a pure-play in the Internet of Things (IoT) market.
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With IoT spending expected to accelerate over the next few years, Silicon Labs is a top mid-cap growth stock that offers big upside potential. Let's follow the breadcrumbs from Silicon's last earnings report to see why the stock might still have room to run.
Perfect storm of growth
Silicon is a leading provider of chips and software solutions for the IoT market. Its main product is mixed-signal integrated circuits used in electronics. Its products are also found in medical devices, data centers, wireless base stations, electric vehicles, and smart TVs, among many other smart devices. In 2020, Silicon Labs acquired Redpine Signals for $317 million to boost its development of Wi-Fi and Bluetooth software solutions, which is starting to pay off.
After modest growth leading up to the pandemic, the IoT market has heated up over the last year. Through the first three quarters of 2021, the company posted a 40% year-over-year increase in revenue. This resulted in a massive jump in gross profit, leading to a much narrower operating loss of $35 million, compared to $89 million during the same period in 2020.
Management cited strong demand across all products and technologies in the third quarter. Specifically, wireless products grew 48% year over year, including growth from Bluetooth, Wi-Fi, Z-Wave, Zigbee, Thread, and Proprietary technologies.
Management credits the current momentum to design wins over the last few years. Overall, the number of design wins for its products grew at an annualized rate of 27% per year from 2016 through 2020. That explains Silicon Labs' improved revenue growth.
Management estimates the company's serviceable addressable market to reach over $10 billion by 2023, up from $7 billion in 2019. That's a huge growth opportunity for a market leader that generated just $1.1 billion in trailing-12-month revenue.
SLAB data by YCharts
The only obstacle standing in its way is supply chain disruptions. However, executives noted on the Q3 earnings call that they are finding opportunities to increase supply every quarter, in addition to passing higher costs on to customers to maintain profit margins. President Matt Johnson said, "Even though we're incrementing up our supply, demand continues to increase at a faster rate."
The favorable demand environment has analysts revising their adjusted (non-GAAP) earnings per share (EPS) forecasts higher. Current analyst estimates call for adjusted EPS to hit $2.35 in 2022, before improving to $3.45 in 2023.
At the current quote of $179, the stock is expensive relative to EPS estimates. But if revenue growth remains robust as it has in 2021, the stock should grow into its price-to-earnings ratio of 76 based on 2022 estimates.
Favorable industry forecasts
Silicon Labs' latest earnings results confirm the acceleration that experts have predicted would follow the pandemic. Global IoT spending grew a cumulative total of 125% to $248 billion from 2017 through 2020, according to Statista. But over the next five years through 2026, the market is expected to summersault to over $1.5 trillion.
Johnson said, "I think another way to look at it is we're seeing an acceleration or pull-in of multiple markets and applications that were expected to grow and take off and now we're seeing that happen very broadly and across the board."
Keep this one on your watchlist. Momentum is building for Silicon Laboratories to have a big year, and it could be one of the best pure-play IoT stocks to buy for the long term.
