Power Integrations (POWI)

Semiconductor designer Power Integrations (NASDAQ:POWI) met Wall Streets revenue expectations in Q3 CY2025, with sales up 2.7% year on year to $118.9 million. On the other hand, next quarter’s revenue guidance of $102.5 million was less impressive, coming in 11.5% below analysts’ estimates. Its non-GAAP profit of $0.36 per share was 4% above analysts’ consensus estimates.

Company Overview

A leading supplier of parts for electronics such as home appliances, Power Integrations (NASDAQ:POWI) is a semiconductor designer and developer specializing in products used for high-voltage power conversion.

Competitors in the market for high-voltage ICs include ON Semiconductor (NASDAQ:ON) STMicroelectronics (NYSE:STM), NXP Semiconductors (NASDAQ:NXPI), and Infineon.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Power Integrations struggled to consistently increase demand as its $445.6 million of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and suggests it’s a lower quality business. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Power Integrations’s recent performance shows its demand remained suppressed as its revenue has declined by 3.6% annually over the last two years.

This quarter, Power Integrations grew its revenue by 2.7% year on year, and its $118.9 million of revenue was in line with Wall Street’s estimates. Although the company met estimates, this was its third consecutive quarter of decelerating growth, indicating a potential cyclical downturn. Company management is currently guiding for a 2.6% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 11.6% over the next 12 months, an improvement versus the last two years. This projection is above the sector average and suggests its newer products and services will catalyze better top-line performance.

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, Power Integrations’s DIO came in at 277, which is 60 days above its five-year average. These numbers suggest that despite the recent decrease, the company’s inventory levels are higher than what we’ve seen in the past.

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

Power Integrations’s gross margin is well ahead of its semiconductor peers, and its strong pricing power is an output of its differentiated, value-add products. As you can see below, it averaged an excellent 54% gross margin over the last two years. That means Power Integrations only paid its suppliers $46.04 for every $100 in revenue.

In Q3, Power Integrations produced a 54.5% gross profit margin, in line with the same quarter last year. On a wider time horizon, Power Integrations’s full-year margin has been trending up over the past 12 months, increasing by 1.8 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Power Integrations was profitable over the last two years but held back by its large cost base. Its average operating margin of 2.2% was weak for a semiconductor business. This result is surprising given its high gross margin as a starting point.

Analyzing the trend in its profitability, Power Integrations’s operating margin decreased by 22.1 percentage points over the last five years. Power Integrations’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Power Integrations generated an operating margin profit margin of negative 3.3%, down 13.3 percentage points year on year. Since Power Integrations’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Power Integrations, its EPS declined by 2.8% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.

Diving into the nuances of Power Integrations’s earnings can give us a better understanding of its performance. As we mentioned earlier, Power Integrations’s operating margin declined by 22.1 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, Power Integrations reported adjusted EPS of $0.36, down from $0.40 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 4%. Over the next 12 months, Wall Street expects Power Integrations’s full-year EPS of $1.32 to grow 16.7%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Power Integrations has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 16.7%, subpar for a semiconductor business.

Taking a step back, we can see that Power Integrations’s margin dropped by 6.3 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its relatively low cash conversion. If the longer-term trend returns, it could signal it’s in the middle of a big investment cycle.

Power Integrations’s free cash flow clocked in at $24.16 million in Q3, equivalent to a 20.3% margin. The company’s cash profitability regressed as it was 3.2 percentage points lower than in the same quarter last year, but it’s still above its two-year average. We wouldn’t read too much into this quarter’s decline because capital expenditures can be seasonal and companies often stockpile inventory in anticipation of higher demand, leading to short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Power Integrations’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 21%, slightly better than typical semiconductor business.

Companies with more cash than debt have lower bankruptcy risk.

Power Integrations is a profitable, well-capitalized company with $241.9 million of cash and no debt. This position is 10.9% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was great to see a material improvement in Power Integrations’s inventory levels. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed. Zooming out, we think this was a mixed quarter. Investors were likely hoping for more, and shares traded down 2.9% to $37.81 immediately after reporting.

Updated: December 4, 2025 at 9:25 PM EST

Before deciding whether to buy Power Integrations or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

We cheer for all companies solving complex technology issues, but in the case of Power Integrations, we’ll be cheering from the sidelines. For starters, its revenue growth was weak over the last five years. And while its gross margins indicate it has pricing power, the downside is its projected EPS for the next year is lacking. On top of that, its declining operating margin shows the business has become less efficient.

Power Integrations’s P/E ratio based on the next 12 months is 31.8x. This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $49.40 on the company (compared to the current share price of $36.44).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.