The Meek Shall Inherit the Chip Market -- Not!

Thanks to a strong second-quarter report, shares of Silicon Laboratories (NAS: SLAB) soared as much as 14% on Wednesday.

Sales were up 7.5% year over year, GAAP earnings per share jumped 62%, and Silicon Labs saw $12.4 million of free cash flowing through its doors. Management claims to be stealing market share from big-name rivals such as Texas Instruments (NYS: TXN) and Atmel (NAS: ATML) , particularly when it comes to audio chips and digital TV tuners. CEO Tyson Tuttle likes where his company is going: "Because of our diversification, our performance is not dependent on the help of any one end market," he said. "Our strong product differentiation enables meaningful market share gains, adding up this year to better-than-industry growth."

So everything is hunky-dory, right?

Not so fast. The longtime Stock Advisor recommendation still has its share of problems.

For one, the stock still hasn't recovered from the damage dealt by the first-quarter report. Measuring from just before that business update, Silicon Labs shares are down 7%, while the general market has traded pretty much sideways. The first quarter wasn't bad, but that's when management started talking about exiting the smartphone touchscreen controller market.

That topic never came up for discussion in this week's report, so let's just assume that Tuttle still wants to unload that division. Strangely enough, the idea doesn't seem insane anymore. You see, smartphones have already become commonplace across the developed world, leaving little room for dramatic growth. Investors are already looking for the next big catalyst in mobile markets, and increasingly, standardized touchscreen parts don't seem to be it.

Maybe Silicon Labs is right to refocus on audio processors, filling in the gap between cheapo low-end chips and the top-shelf Cirrus Logic (NAS: CRUS) portfolio. We'll learn more about demand for TV tuners when Sigma Designs (NAS: SIGM) reports after tonight's closing bell. Maybe that's the market where a quality product or two could carve out a profitable growth niche right now.

Silicon Labs is changing a winning team -- but perhaps for the better. Add the stock to your Foolish watchlist to keep a close eye on this bold bet. And speaking of big, bold bets, the Stock Advisor team just cooked up a fresh report on why "The Future Is Made in America." It's yours for the asking, but only for a limited time. Get your copy now by clicking right here.

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Fool contributorAnders Bylundholds no position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+.The Motley Fool owns shares of Cirrus Logic. Motley Fool newsletter services have recommended buying shares of Silicon Laboratories. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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