Monolithic Power Systems Has To Rebound Or Trouble Ahead (MPWR)

Monolithic Power Systems or MPS (NASDAQ:MPWR), a supplier of semiconductor-based power solutions, is not that bad off all things considered. While some of its peers in the semiconductor industry are facing weakening demand, MPWR is seeing none of it. MPWR continues to reach new heights in terms of the top and the bottom line. The stock has also outperformed, having fallen less than most semis. While there has been lots of volatility, the stock has spent most of 2022 moving within a range. However, the stock is once again near the lower end of this range, which means the stock is either due for a reversal or there is more trouble ahead. Why will be covered next.

Why the stock has a decision to make

MPWR has shown a lot of resilience in 2022. The stock is only down 24% for the year and it even managed to trade in positive territory for some time. In comparison, the iShares Semiconductor ETF (SOXX) has lost 39% YTD. The chart below shows how volatile the stock has been this year. The 52-week range is $361-576 or $348-580 if intraday highs and lows are included.

Some may want to take advantage of the sideways action by buying whenever the stock reaches the bottom and selling whenever the stock approaches the top of the range. Note that the stock is currently at the lower end of this range. There have been numerous instances of the stock bouncing whenever it got to this point, suggesting the presence of solid support in or around the $350-375 region.

The stock has lost about 30% of its value since early August, but the slide has paused in the last several days with the stock hovering just above $360, suggesting support is doing its work. If the current trend holds, the stock is likely due for a bounce in the near term with the stock around $367, especially with the stock oversold after the recent decline.

On the other hand, it’s worth mentioning that if support fails to hold, the stock could have a long way to go before it finds solid support again. The stock has appreciated by so much in the last few years that there is a lot of room before the bottom is truly in. Note that while the stock is off its highs, it has still gained about 150% since the lows in March 2020. In addition, what was solid support is likely to become solid resistance once the stock falls below it. In other words, if the stock falls much further and support is lost, it is unlikely to get back to where it is now at for some time. The bears would gain the upper hand.

What could help the stock’s chances of a bounce

If the stock is to bounce at support like it has done all year, it will need buyers to step in. If buyers are to step in, they need to be convinced it makes sense to do so. Strong growth helps in this regard. It just so happens that MPWR is doing great when it comes to this. MPWR is currently breaking records left and right.

MPWR did not make it easy by setting the bar high, but it still managed to sail past expectations for the top and the bottom line. Q2 revenue increased by 57% YoY to $461M, a record high. GAAP EPS increased by 104% YoY to $2.37 and non-GAAP EPS increased by 80% YoY to $3.25. The table below shows the numbers for Q2 FY2022.

The main difference between the GAAP and non-GAAP numbers can be attributed to stock-based compensation expense. The latter excludes $42.9M of it, but the former does not. Note that EPS growth was less than that of net income due to share dilution. The non-GAAP weighted average of shares outstanding was 48.3M in Q2 FY2022, up from 47.8M in Q2 FY2021. Cash, cash equivalents and short-term investments totaled $814.1M, up from $775.9M in the preceding quarter. The balance sheet is in top shape.

(GAAP)	Q2 FY2022	Q1 FY2022	Q2 FY2021	QoQ	YoY
Revenue	$461.004M	$377.714M	$293.317M	22.05%	57.17%
Gross margin	58.8%	57.9%	56.0%	90bps	280bps
Operating income	$141.888M	$96.134M	$60.628M	47.59%	134.03%
Net income	$114.679M	$79.566M	$55.169M	44.13%	107.87%
EPS	$2.37	$1.65	$1.16	43.64%	104.31%
(Non-GAAP)
Revenue	$461.004M	$377.714M	$293.317M	22.05%	57.17%
Gross margin	59.0%	58.3%	56.3%	70bps	270bps
Operating income	$179.449M	$133.613M	$94.906M	34.31%	89.08%
Net income	$157.011M	$118.275M	$86.468M	32.75%	81.58%
EPS	$3.25	$2.45	$1.81	32.65%	79.56%

Click to enlarge

Source: MPWR

Guidance calls for Q3 FY2022 revenue of $480-500M, an increase of 51% YoY at the midpoint. Not only does this represent another all-time high, but it would also mark the 37th consecutive YoY increase in quarterly revenue. The last time revenue did not grow YoY was Q2 FY2013, nine years ago. In terms of track record, MPWR is top notch when it comes to consistent growth.

	Q3 FY2022 (guidance)	Q3 FY2021	YoY (midpoint)
Revenue	$480-500M	$323.5M	51.47%
GAAP gross margin	58.4-59.0%	57.6%	110bps
Non-GAAP gross margin	58.7-59.3%	57.8%	120bps

Click to enlarge

What could hurt the stock’s chances of a sustained bounce

However, if there’s one reason why people may refrain from getting in on MPWR, then it probably has to do with valuations. The table below compares the multiples for MPWR and some of the competitors mentioned in the most recent Form 10-K. MPWR competes in the crowded analog semiconductor market, but MPWR considers Analog Devices (ADI), Texas Instruments (TXN), NXP Semiconductors (NXPI) and ON Semiconductor (ON) to be among its primary competitors.

	MPWR	ADI	TXN	NXPI	ON
Market cap	$17.37B	$73.00B	$147.37B	$40.16B	$27.43B
Enterprise value	$16.56B	$77.72B	$146.23B	$48.03B	$29.12B
Revenue (“ttm”)	$1,498.7M	$11,105.8M	$19,592.0M	$12,348.0M	$7,618.2M
EBITDA	$434.2M	$5,415.5M	$11,247.0M	$4,552.0M	$2,814.8M
Trailing P/E	52.78	38.52	17.56	16.61	16.25
Forward P/E	39.52	27.16	16.99	14.67	13.50
P/S	11.35	6.49	7.56	3.26	3.56
P/B	12.08	1.98	10.42	5.73	5.04
EV/sales	11.05	7.00	7.46	3.89	3.82
Trailing EV/EBITDA	38.15	14.35	13.00	10.55	10.34
Forward EV/EBITDA	24.30	12.60	12.77	8.81	8.90

Click to enlarge

Source: SeekingAlpha

In general, MPWR trades at much higher multiples. EBITDA margins are also less. However, it’s worth mentioning that multiples have come down. For instance, PE ratios were in the triple digits when the stock peaked in late 2021 as mentioned in an earlier article. The stock’s decline and continued growth have brought down multiples, although they may still be too high for some people when other stocks like ON are available at lower valuations with earnings growth that some may deem to be more impressive.

However, an argument can be made that MPWR deserves higher multiples because of its consistent track record when it comes to growth as mentioned earlier. MPWR has managed to grow faster than the industry for years and FY2022 is no exception. For instance, consensus estimates expect FY2022 revenue of $1.79-1.85B, up from $1.2B in FY2021, which represents a YoY increase of 52% at the midpoint. FY2022 non-GAAP EPS is expected to increase by 70% YoY with consensus estimates at $12.49-12.82.

In comparison, the analog semiconductor market is projected to grow by 21.9% YoY in 2022 according to WSTS. On the other hand, growth is expected to slow down to just 6.4% in 2023, which some may see as a warning sign for relevant names and a reason to stay away from MPWR. Still, MPWR is growing much faster than the overall market, something it has managed to do for many years, which some might argue deserves to be rewarded with a higher multiple than other companies who are not growing as fast or don’t have as strong a track record.

MPWR is dealing with other issues

There are other issues that may give people pause. There are concerns MPWR’s fast growth may in part be due to customers ordering more than they actually need for various reasons, which means real demand may not be as strong as the headline numbers suggest it is. Keep in mind that MPWR has in the past stated that inventory building, particularly in China, boosted growth as covered in an earlier article.

These concerns are likely to remain since MPWR acknowledges it cannot keep track of what customers end up doing with the inventory shipped to them. From the Q2 earnings call:

“I don’t really know. I mean it’s difficult. And as you know, we sell – these are building blocks. And for more or less in a server and data center areas, and these are more generic parts, and they can be used multiple awake. And it’s hard to track.”

A transcript of the Q2 FY2022 earnings call can be found here.

In theory, it’s possible MPWR’s recent growth is partially due to inventory building in China, which would help explain why MPWR is growing so much faster than the market. If it happened before, it’s possible it’s happening again. Note that MPWR is a company with heavy exposure to China with the latter accounting for 54.2% of total revenue in Q2. Some people may regard this level of exposure as undesirable due to all the potential fallout MPWR could be subjected to, whether due to COVD-19 lockdowns or escalating tensions between the U.S. and China.

Investor takeaways

It’s tempting to be long, but I am neutral on MPWR. Going long when a stock is just above support makes sense, especially if the stock in question has shown consistent growth for many years like MPWR has. At the same time, buying stocks is not without risks, especially in today’s market. At the very least, today’s market is skewed towards risk-off due to all the headwinds out there, including central banks tightening policy and a weakening global economy. Buyers of stocks are harder to come by these days.

The stock is essentially stuck in a range, facing upward and downward pressure. The bulls can point to strong earnings growth for the former, while the bears can point to high multiples for the latter. While the stock is likely to bounce in the short term, the stock is also likely to continue going sideways as it has all year. Continued growth combined with sideways action should bring down multiples to more conservative levels, which is probably the most likely course of action for the stock.

Bottom line, there is no one-size-fits-all when it comes to MPWR. There are arguments in favor of long MPWR, just as there are arguments against it. Some may decide to go long MPWR with the way the charts are currently laid out. Granted, support could fail, but the odds are against it. Others may decide to do the opposite with the stock trading at much higher multiples than its main competitors, betting that growth will eventually slow down along with the semiconductor market, as is already the case with other semis.

Still others may decide that both of the two aforementioned groups make legitimate arguments and there is no way of knowing for sure which one is making the right move. If this is the case, then it may not be worth taking the risk to find out which of the two has it right. If two sides make equally valid arguments, it may be better to avoid potential losses by staying neutral and not taking any sides. Standing on the sidelines may just be the most appropriate move considering the circumstances.