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Monolithic Power Systems (NASDAQ:MPWR) Exceeds Q3 Expectations, Guides For Strong Sales Next Quarter


Full Report / November 02, 2021
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Power management chips maker Monolithic Power Systems (NASDAQ: MPWR) reported Q3 FY2021 results beating Wall St's expectations, with revenue up 24.7% year on year to $323.5 million. Guidance for next quarter's revenue was $320 million at the midpoint, 4.35% above the average of analyst estimates. Monolithic Power Systems made a GAAP profit of $68.7 million, improving on its profit of $55.5 million, in the same quarter last year.

Monolithic Power Systems (MPWR) Q3 FY2021 Highlights:

  • Revenue: $323.5 million vs analyst estimates of $316 million (2.36% beat)
  • EPS (non-GAAP): $2.06 vs analyst estimates of $2 (3.08% beat)
  • Revenue guidance for Q4 2021 is $320 million at the midpoint, above analyst estimates of $306.6 million
  • Inventory Days Outstanding: 138, up from 125 previous quarter
  • Gross Margin (GAAP): 57.5%, up from 55.1% 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 strong, averaging 26.6% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $259.4 million to $323.5 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 decent quarter for Monolithic Power Systems as revenues grew 24.7%, topping analyst estimates by 2.36%.

Monolithic Power Systems believes the growth is set to continue, and is guiding for revenue to grow 23.3% YoY next quarter, and Wall St analysts are estimating growth 19.4% 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 138, 22 days below the five year average, showing that despite the recent increase there is no indication of an excessive inventory buildup at the moment.

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 57.5% in Q3, 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 56%, indicative of a potent competitive offering, pricing power, and efficient inventory management.

Profitability

Monolithic Power Systems reported an operating margin of 24.3% in Q3, down 8.4 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 down over the last year, averaging 28.7%. However, Monolithic Power Systems's margins remain one of the highest in the industry, driven by its strong gross margins and economies of scale generated from its highly efficient operating model.

Earnings & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 20% over the next twelve months. Monolithic Power Systems’s average return on invested capital (ROIC) over the last 5 years of 46.6% 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 Q3 Results

With a market capitalization of $24.3 billion and more than $742 million in cash, the company has the capacity to continue to prioritise growth.

We enjoyed the positive outlook Monolithic Power Systems provided for the next quarter’s revenue. And we were also glad to see that earnings outperformed analysts' expectations. On the other hand, it was less good to see the pretty significant deterioration in operating margin and inventory levels increased. Overall, this quarter's results were mixed, the company currently trades at $529.28 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 solid, over the last two years. On top of that, its high return on invested capital suggests it is well run and in a strong position for profit growth, and its impressive operating margins are indicative of an highly efficient business model.

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 67.3x. But looking at the semiconductors landscape today, Monolithic Power Systems's qualities stand out and we still like it at this price.

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