Trading of the day: Silicon Laboratories (SLAB) shares signal a death cross

Silicon laboratories (NASDAQ:PLATE) is a fabless semiconductor company that offers a variety of products, including wireless microcontrollers and sensor equipment. The company serves a range of applications in the broader Internet of Things (IoT), such as industrial automation and smart building control. Nevertheless, SLAB stock was a flop.

There’s no other way to put it. Since the beginning of the year, SLAB stock has fallen by more than 14%. Over the last 52 weeks, the stock has suffered a slump of almost 32%. And over the last five years, the technology company has returned less than 6%. That’s not what the doctor ordered.

But it’s not hard to see why SLAB stock is underperforming when you look at the financial context. For fiscal 2024, analysts are forecasting a sharp erosion in earnings to a loss of $1.40 per share. Last year, the company reported earnings of $1.59 per share. Additionally, revenue could fall 19.5% to $629.67 million.

As a result, many people exited SLAB stocks, creating a technical pattern called the “Death Cross.”

Fearsome name, compelling opportunity

In many, if not most, cases, a flashing death cross is a phenomenon to watch closely, as it can herald even greater pain to come. This pattern describes the situation where a longer-term moving average (usually the 200-day average) slides below a shorter-term moving average (usually the 50-day average).

The classic meaning of the Death Cross is that bullish sentiment has faded and is replaced by selling pressure, leading to a transition from a cycle of optimism to one of pessimism. However, the pattern can also be used as a contrarian indicator.

Source: TD Ameritrade’s thinkorswim® platform

What makes SLAB stock a candidate for a potential recovery are its fundamentals. As mentioned, the company offers relevant products for relevant services. Wireless microcontrollers and IoT are not likely to go away anytime soon. Moreover, analysts are optimistic that Silicon Laboratories will get its act together in the long run.

For fiscal year 2025, experts expect earnings per share to reach $2.80 on revenue of $934.09 million. This is far from what the company could achieve in 2023. In addition, SLAB stock enjoys a consensus rating of Moderate Buy with an average price target of $136. This means an upside potential of over 24%.

Trade of the day: Buy SLAB shares at the predicted discount

For Tuesday’s Trade of the Day, we’re keeping it simple: Buy SLAB stock on the belief that the death cross is a contrarian indicator. As mentioned, it’s too relevant to simply ignore. In addition, analysts are expecting a recovery in financials that may come sooner than expected.

Currently, SLAB stock is trading at a last year sales multiple of 5.42x. Currently, the average sales multiple in the semiconductor sector is 4.35x. Therefore, Silicon Laboratories is slightly overvalued. Assuming fiscal 2025 revenues of $934.09 million and the number of shares outstanding remains at around 31.92 million, SLAB is currently trading at 3.74x forecast 2025 revenues.

However, if you wait too long, the company may grow into its value and the opportunity will be wiped out. The Death Cross Ping gives you the chance to speculate on what might happen in the future. It’s risky, but there’s a method behind the madness.

At the time of publication, Josh Enomoto had no position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com Publishing guidelines.