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Monolithic Power Systems (NASDAQ:MPWR) Beats Expectations in Strong Q1, Stock Soars


Full Report / May 02, 2022
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Power management chips maker Monolithic Power Systems (NASDAQ: MPWR) reported Q1 FY2022 results that beat analyst expectations, with revenue up 48.4% year on year to $377.7 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $430 million at the midpoint, 13.5% above what analysts were expecting. Monolithic Power Systems made a GAAP profit of $79.5 million, improving on its profit of $45.4 million, in the same quarter last year.

Monolithic Power Systems (MPWR) Q1 FY2022 Highlights:

  • Revenue: $377.7 million vs analyst estimates of $360.4 million (4.8% beat)
  • EPS (non-GAAP): $2.45 vs analyst estimates of $2.26 (8.58% beat)
  • Revenue guidance for Q2 2022 is $430 million at the midpoint, above analyst estimates of $378.5 million
  • Inventory Days Outstanding: 178, up from 166 previous quarter
  • Gross Margin (GAAP): 57.9%, up from 55.4% same quarter last year

Founded in 1997 by its longtime CEO Michael Hsing, Monolithic Power Systems (NASDAQ: MPWR) is an analog and mixed signal chipmaker that specializes in power management chips meant to minimize total energy consumption.

Monolithic Power Systems’ peers and competitors include Analog Devices (NASDAQ:ADI), Texas Instruments (NASDAQ:TXN), Skyworks (NASDAQ:SWKS), Infineon (XTRA:IFX), NXP Semiconductors NV (NASDAQ:NXPI), ON Semi (NASDAQ:ON), Marvell Technology (NASDAQ:MRVL), and Microchip (NASDAQ:MCHP).

Analog Semiconductors

Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods. Read More The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. By comparison, analog chips regulate real world signals, such as temperature, speed, sound, or electrical current, converting them into a stream of digital data that can be processed by digital semiconductors. Analog semiconductors are also used to manage power in any electronic device; they convert, store and distribute the electrical energy that comes from a battery or wall plug. Analog chips are found everywhere from household appliances like refrigerators or washing machines, to smartphones, cars and factory production lines.

Sales Growth

Monolithic Power Systems's revenue growth over the last three years has been very strong, averaging 32% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $254.4 million to $377.7 million. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Monolithic Power Systems Total Revenue

This was a great quarter for Monolithic Power Systems with 48.4% revenue growth, beating analyst estimates by 4.8%.

Monolithic Power Systems believes the growth is set to continue, and is guiding for revenue to grow 46.5% YoY next quarter, and Wall St analysts are estimating growth 19.2% over the next twelve months.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Monolithic Power Systems Inventory Days Outstanding

This quarter, Monolithic Power Systems’s inventory days came in at 178, 16 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Pricing Power

Monolithic Power Systems's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 57.9% in Q1, up 2.5 percentage points year on year.

Monolithic Power Systems Gross Margin (GAAP)

Over the past year, Monolithic Power Systems has seen its already strong gross margins continue to rise, averaging 57.2%, indicative of a potent competitive offering, pricing power, and efficient inventory management.

Profitability

Monolithic Power Systems reported an operating margin of 35.3% in Q1, up 5.6 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

Monolithic Power Systems Adjusted Operating Margin

Operating margins have been trending up over the last year, averaging 31.3%. Monolithic Power Systems's margins remain one of the highest in the semiconductor industry, driven by its highly efficient operating model's economies of scale.

Earnings & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 17.1% over the next twelve months, although estimates are likely to change post earnings.

Monolithic Power Systems’s average return on invested capital (ROIC) over the last 5 years of 47% implies it has a strong competitive position and is able to invest in profitable growth over the long term.

Key Takeaways from Monolithic Power Systems's Q1 Results

With a market capitalization of $18.2 billion and more than $773.5 million in cash, the company has the capacity to continue to prioritise growth.

We were impressed by how strongly Monolithic Power Systems outperformed analysts’ earnings expectations this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the inventory levels increase. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The company is up 5.78% on the results and currently trades at $435 per share.

Is Now The Time?

When considering Monolithic Power Systems, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Monolithic Power Systems is a great business. While we would expect growth rates to moderate from here, its revenue growth has been strong, over the last three years. On top of that, its impressive operating margins are indicative of an highly efficient business model, and its high return on invested capital suggests it is well run and in a strong position for profit growth.

The market is certainly expecting long term growth from Monolithic Power Systems given its price to earnings ratio based on the next twelve months is 42.0x. But looking at the semiconductors landscape today, Monolithic Power Systems's qualities stand out and we still like it at this price.

The Wall St analysts covering the company had a one year price target of $577 per share right before these results, implying that they saw upside in buying Monolithic Power Systems even in the short term.

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