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Monolithic Power Systems (NASDAQ:MPWR) Exceeds Q3 Expectations But Stock Drops


Full Report / October 27, 2022
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Power management chips maker Monolithic Power Systems (NASDAQ: MPWR) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 53.1% year on year to $495.4 million. However, guidance for the next quarter was less impressive, coming in at $460 million at the midpoint, being 5.74% below analyst estimates. Monolithic Power Systems made a GAAP profit of $124.3 million, improving on its profit of $68.7 million, in the same quarter last year.

Monolithic Power Systems (MPWR) Q3 FY2022 Highlights:

  • Revenue: $495.4 million vs analyst estimates of $490.7 million (0.95% beat)
  • EPS (non-GAAP): $3.53 vs analyst estimates of $3.49 (1.24% beat)
  • Revenue guidance for Q4 2022 is $460 million at the midpoint, below analyst estimates of $488 million
  • Inventory Days Outstanding: 177, up from 172 previous quarter
  • Gross Margin (GAAP): 58.7%, up from 57.5% 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 40.1% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $323.5 million to $495.4 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 fantastic quarter for Monolithic Power Systems with 53.1% revenue growth, beating analyst estimates by 0.95%.

Monolithic Power Systems believes the growth is set to continue, and is guiding for revenue to grow 36.6% YoY next quarter, and Wall St analysts are estimating growth 23.9% 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 177, 13 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 58.7% in Q3, up 1.1 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 58.2%, indicative of a potent competitive offering, pricing power, and efficient inventory management.

Profitability

Monolithic Power Systems reported an operating margin of 39% in Q3, up 14.8 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 36.6%. 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 26% 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 50.9% 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 $15.5 billion and more than $736 million in cash, the company has the capacity to continue to prioritise growth.

We were very impressed by the strong improvements in Monolithic Power Systems’s operating margin this quarter. And we were also excited to see the really strong revenue growth. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the inventory levels increased a little. Zooming out, we think this was still a decent, albeit mixed, quarter. But the market was likely expecting more and the company is down 5.92% on the results and currently trades at $310 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 impressive, 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.

Monolithic Power Systems's price to earnings ratio based on the next twelve months is 23.8x. 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 $543.1 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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