No Surprises In Monolithic Power Systems's (NASDAQ:MPWR) Q1 Sales Numbers But Stock Drops 10%

Power management chips maker Monolithic Power Systems (NASDAQ: MPWR) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue up 19.4% year on year to $451.1 million. However, guidance for the next quarter was less impressive, coming in at $440 million at the midpoint, being 3.57% below analyst estimates. Monolithic Power Systems made a GAAP profit of $109.8 million, improving on its profit of $79.6 million, in the 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 impressive, averaging 42.6% annually. But as you can see below, last year has not been especially strong, with quarterly revenue growing from $377.7 million to $451.1 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).

This was a decent quarter for Monolithic Power Systems as revenues grew 19.4%, topping analyst estimates by 0.47%. This was the third straight quarter of decelerating growth for Monolithic Power Systems, potentially indicating a coming cycle downturn.

Monolithic Power Systems's revenue growth has slowed for the last three quarters and the company expects growth to turn negative next quarter guiding to a 4.56% year on year decline, but analysts think it will recover next year, as consensus NTM revenues are forecast to grow 9.63%.

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.

This quarter, Monolithic Power Systems’s inventory days came in at 204, 36 days above the five year average, suggesting that despite the recent decrease the inventory levels are still higher 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 57.4% in Q1, down 0.6 percentage points year on year.

Over the past year, Monolithic Power Systems has seen its already reasonably high gross margins continue to rise, averaging 58.3%, indicative of a solid competitive offering, efficient cost controls, and relatively low pricing pressure.

Profitability

Monolithic Power Systems reported an operating margin of 36.4% in Q1, up 1 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.

Operating margins have been trending up over the last year, averaging 38.1%. Monolithic Power Systems's margins remain towards the high end of semiconductor companies, driven by its efficient operating model's economies of scale.

Earnings & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 7.43% 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 54.3% 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 $22 billion and more than $917.6 million in cash, the company has the capacity to continue to prioritise growth.

A highlight was Monolithic Power Systems’s improvement of their inventory levels this quarter. And we were also happy to see that earnings topped expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company is down 10.7% on the results and currently trades at $410 per share.

Is Now The Time?

Monolithic Power Systems may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. There are numerous reasons why we think Monolithic Power Systems is one of the best semiconductor companies out there. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last three 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 strong operating margins are indicative of a well run business.

Monolithic Power Systems's price to earnings ratio based on the next twelve months is 33.1x. Looking at the semiconductors landscape today, Monolithic Power Systems's qualities really stand out, and we really like it at this price.

The Wall St analysts covering the company had a one year price target of $551.8 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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