What happened
Shares of Silicon Laboratories(NASDAQ: SLAB) were down 9.5% as of 10:02 a.m. ET on Wednesday after the company reported second-quarter earnings. The stock is up 44% over the last five years but is underperforming the Nasdaq's rally this year, up only 5.6% compared to 35% for the index.
The company beat revenue and earnings expectations in the second quarter, but management guided below the consensus estimates for the third quarter, which sent the stock tumbling.
So what
For the recent quarter, revenue was down 7% year over year, but in line with management's expectations. Wireless technology demand in the industrial business was offset by weakness in the home and life business, which supplies its leading wireless products to manufacturers of smart-home and connected-health devices.
Home and life revenue fell 33% year over year, suffering from bloated inventory in the sales channel.
However, what sent ripples through the market was management's commentary on expected weakness in both business segments heading into the third quarter.
Now what
The company expects next quarter's revenue to land between $190 million and $210 million, with adjusted earnings per share coming in between $0.45 to $0.73 -- both metrics well below Wall Street analysts' expectations.
The stock is not cheap, trading at a forward price-to-earnings (P/E) ratio of 33, which is higher than the average stock's P/E of 26. The market is going to be extra sensitive to weak guidance from Silicon Laboratories because of the cyclical nature of demand for its wireless chip products. These products are obviously not immune to the macroeconomic headwinds that are pressuring end-market demand.
The stock has outperformed the market going back to 2016. This reflects the long-term demand for smart devices. The trends toward an increasingly connected world will spell more growth for the company, but investors will have to tolerate some volatility in the stock along the way.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Silicon Laboratories. The Motley Fool has a disclosure policy.
