Power management chips maker Monolithic Power Systems (NASDAQ:MPWR) reported results in line with analysts' expectations in Q4 FY2023, with revenue down 1.3% year on year to $454 million. The company expects next quarter's revenue to be around $447 million, coming in 2.3% above analysts' estimates. It made a non-GAAP profit of $2.88 per share, down from its profit of $3.17 per share in the same quarter last year.
Monolithic Power Systems (MPWR) Q4 FY2023 Highlights:
- Revenue: $454 million vs analyst estimates of $452.2 million (small beat)
- EPS (non-GAAP): $2.88 vs analyst estimates of $2.85 (small beat)
- Revenue Guidance for Q1 2024 is $447 million at the midpoint, above analyst estimates of $436.9 million
- Inventory Days Outstanding: 172, up from 171 in the previous quarter
- Gross Margin (GAAP): 55.3%, down from 58.2% in the same quarter last year
- Market Capitalization: $30.33 billion
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).
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 32.1% annually. But as you can see below, its revenue declined from $460 million in the same quarter last year to $454 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 slow quarter for the company as its revenue dropped 1.3% year on year, in line with analysts' estimates. This could mean that the current downcycle is deepening.
Monolithic Power Systems may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 0.9% next quarter, analysts are expecting revenue to grow 11.2% over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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 DIO came in at 172, which is 5 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Monolithic Power Systems's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 55.3% in Q4, down 2.9 percentage points year on year.
Despite declining over the last 12 months, Monolithic Power Systems still retains reasonably high gross margins, averaging 56.1%. These margins point to its solid competitive offering, disciplined cost controls, and lack of significant pricing pressure.
Monolithic Power Systems reported an operating margin of 34.4% in Q4, down 3.5 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Monolithic Power Systems's operating margins have been trending down over the last year, averaging 35.2%. However, the company's profitability remains one of the strongest in the industry, driven by its solid gross margins and economies of scale generated from its highly efficient operating model.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
Monolithic Power Systems's five-year average ROIC was 51.3%, placing it among the best semiconductor companies. Just as you’d like your investment dollars to generate returns, Monolithic Power Systems's invested capital has produced excellent profits.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Monolithic Power Systems's ROIC has averaged a 9.9 percentage point increase each year. Monolithic Power Systems has historically shown the ability to generate good returns, and its rising ROIC is a great sign. It could suggest its competitive advantage or profitable business opportunities are expanding.
Key Takeaways from Monolithic Power Systems's Q4 Results
It was good to see Monolithic Power Systems's strong revenue guidance for next quarter, which topped analysts' expectations. We were also happy its EPS narrowly outperformed Wall Street's estimates. On the other hand, its gross margin fell and its operating margin decreased. Overall, this was a decent quarter for Monolithic Power Systems. The stock is flat after reporting and currently trades at $645.41 per share.
Is Now The Time?
When considering an investment in Monolithic Power Systems, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
There are numerous reasons why we think Monolithic Power Systems is one of the best semiconductor companies out there. For starters, its impressive revenue growth over the last three years suggests it's increasing its market share, and its growth over the next 12 months is expected to exceed that. Additionally, its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion, and its stellar ROIC suggests it has been a well-run company historically.
Monolithic Power Systems's price-to-earnings ratio based on the next 12 months is 50.2x. Looking at the semiconductors landscape today, Monolithic Power Systems's qualities really stand out, and we really like it at this price.
Wall Street analysts covering the company had a one-year price target of $632.75 per share right before these results (compared to the current share price of $645.41).
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