Power management chips maker Monolithic Power Systems (NASDAQ: MPWR) reported Q2 FY2022 results topping analyst expectations, with revenue up 57.1% year on year to $461 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $490 million at the midpoint, 6.44% above what analysts were expecting. Monolithic Power Systems made a GAAP profit of $114.6 million, improving on its profit of $55.1 million, in the same quarter last year.
Monolithic Power Systems (MPWR) Q2 FY2022 Highlights:
- Revenue: $461 million vs analyst estimates of $430.5 million (7.06% beat)
- EPS (non-GAAP): $3.25 vs analyst estimates of $2.94 (10.6% beat)
- Revenue guidance for Q3 2022 is $490 million at the midpoint, above analyst estimates of $460.3 million
- Inventory Days Outstanding: 172, down from 178 previous quarter
- Gross Margin (GAAP): 58.7%, up from 55.9% 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.
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.
Monolithic Power Systems's revenue growth over the last three years has been very strong, averaging 36.1% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $293.3 million to $461 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 fantastic quarter for Monolithic Power Systems with 57.1% revenue growth, beating analyst estimates by 7.06%.
Monolithic Power Systems believes the growth is set to continue, and is guiding for revenue to grow 51.4% YoY next quarter, and Wall St analysts are estimating growth 27.4% 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.
This quarter, Monolithic Power Systems’s inventory days came in at 172, 10 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.
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 58.7% in Q2, up 2.8 percentage points year on year.
Over the past year, Monolithic Power Systems has seen its already strong gross margins continue to rise, averaging 57.9%, indicative of a potent competitive offering, pricing power, and efficient inventory management.
Monolithic Power Systems reported an operating margin of 38.9% in Q2, up 6.6 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.
Operating margins have been trending up over the last year, averaging 32.9%. 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 30% 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 48.7% 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 Q2 Results
With a market capitalization of $21.6 billion and more than $811.8 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 to see the improvement in operating margin. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. The company is up 3.96% on the results and currently trades at $480.01 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 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 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 37.1x is much higher than other semiconductor companies. But looking at the semiconductors landscape today, Monolithic Power Systems's qualities as one of the best businesses really stand out and we still like it at this price, despite the higher multiple.
The Wall St analysts covering the company had a one year price target of $545.3 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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