Power Integrations (POWI)

Semiconductor designer Power Integrations (NASDAQ:POWI) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 15.1% year on year to $105.5 million. The company expects next quarter’s revenue to be around $115 million, close to analysts’ estimates. Its non-GAAP profit of $0.31 per share was 8.9% 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.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Power Integrations struggled to consistently increase demand as its $432.8 million of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of poor business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. Power Integrations’s recent performance shows its demand remained suppressed as its revenue has declined by 13.3% annually over the last two years.

This quarter, Power Integrations’s year-on-year revenue growth was 15.1%, and its $105.5 million of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 8.3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 14.8% over the next 12 months, an improvement versus the last two years. This projection is commendable and implies its newer products and services will spur 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 325, which is 120 days above its five-year average, suggesting that the company’s inventory has grown to higher levels than 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 53.1% gross margin over the last two years. That means Power Integrations only paid its suppliers $46.92 for every $100 in revenue.

In Q1, Power Integrations produced a 55.2% gross profit margin, marking a 3.1 percentage point increase from 52.1% in the same quarter last year. Power Integrations’s full-year margin has also been trending up over the past 12 months, increasing by 2.5 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 6.3% 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 11.7 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 profit margin of 6.4%, up 5.9 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

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 19.7% 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 improved this quarter but declined by 11.7 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Power Integrations reported EPS at $0.31, up from $0.18 in the same quarter last year. This print beat analysts’ estimates by 8.9%. Over the next 12 months, Wall Street expects Power Integrations’s full-year EPS of $1.29 to grow 33.6%.

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 13.6%, subpar for a semiconductor business.

Taking a step back, an encouraging sign is that Power Integrations’s margin expanded by 1.1 percentage points over the last five years. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Power Integrations’s free cash flow clocked in at $20.66 million in Q1, equivalent to a 19.6% margin. This result was good as its margin was 7 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Power Integrations hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 22.7%, impressive for a semiconductor business.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Power Integrations is a profitable, well-capitalized company with $289.3 million of cash and no debt. This position is 9.2% 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.

We liked that Power Integrations beat analysts’ adjusted operating income and EPS expectations this quarter. On the other hand, its inventory levels increased and revenue was only in-line with expectations. Looking ahead, revenue guidance for next quarter was just in line as well. Overall, we think this was a mixed quarter. The market seemed to be hoping for more, and the stock traded down 5.1% to $56 immediately following the results.

Updated: July 9, 2025 at 10:30 PM EDT

Before investing in or passing on Power Integrations, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

We cheer for all companies solving complex technology issues, but in the case of Power Integrations, we’ll be cheering from the sidelines. To begin with, its revenue growth was weak over the last five years. And while its market-beating ROIC suggests it has been a well-managed company historically, the downside is its declining operating margin shows the business has become less efficient. On top of that, its operating margins reveal poor profitability compared to other semiconductor companies.

Power Integrations’s P/E ratio based on the next 12 months is 33.8x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $68.80 on the company (compared to the current share price of $58.08).

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.