Monolithic Power: Robust Growth Across The Board (NASDAQ:MPWR)

The stock of Monolithic power systems (NASDAQ: MPWR) is up more than 52% since my initial Seeking Alpha Buy rating back in September 2020 (see Mpower: EVs an excellent catalyst). However, the stock has fallen by 24% over the past year year as the 2022 bear market the broad semiconductor sector as represented by the VanEck Semiconductor ETF (SMH) (see below). As its name suggests, MPWR utilizes innovative and proprietary technology processes to provide high-performance power solutions to the computer, industrial, automotive and consumer markets. Given the correction in the share price, and considering MPWR continues to show impressive growth, I’m going to look at the company today to see if investors may now have an opportunity to invest at a relatively attractive entry point.

Earnings

MPWR released its Q3 earnings report in late October, and it was once again a strong beat on both the top and bottom lines. Revenue of $461 million (+57.2% YoY) beat consensus estimates by $30.41 million. Non-GAAP EPS of $3.25 was a beat of $0.31. GAAP earnings of $2.57/share were up 78.5% year over year.

Q3 GAAP gross margin was 58.7% compared to 57.6% for the prior year quarter. If so, join MPWR Broadcom (AVGO) as one of the few semiconductor companies that continues to achieve strong revenue and margin growth (see AVGO’s strong results published yesterday).

The following chart shows MPWR’s results across its end markets and by product family:

What this chart shows – again similar to Broadcom – is strong growth across MPower’s various end markets. Note that – despite the current doom and gloom “enterprise” narrative being painted by analysts – MPower’s Enterprise Data revenue grew a whopping 153% year-over-year, while Storage and Computing revenue grew 64% year-over-year has.

Go forward

The midpoint of the company’s fourth-quarter revenue guidance ($460 million) came in below consensus. However, note that if MPWR were to reach that revenue level, it would be 45.6% higher compared to the $336.5 million that MPWR delivered in the fourth quarter of last year.

That’s because MPWR, in addition to the enterprise and data and storage and compute segments, continues to show strong growth in its automotive business with its well-diversified footprint and a growing TAM driven by the EV transition (slides are from MPWR’s November -presentation):

This is because MPWR continues to deliver electrification solutions that save power and space. The company estimates that its new products across digital cockpit, lighting, electrification, advanced driver assistance systems (“ADAS”) and body control solutions represent a $400/car incremental opportunity. The company also reports that it has $1 billion in design wins in the pipeline.

MPWR is also a growing presence in the clean energy market, with strong product development and a growing number of design wins:

Shareholder returns

Since 2005, MPower has returned ~50% of cash generation to shareholders through dividends and share buybacks. In February, MPWR increased the quarterly dividend from $0.60 to $0.75/share (25%). Given the company’s outstanding financial performance during this year, I would expect the dividend to be increased to as much as $1.00/share in February 2023. If the company were to decide on a lower dividend increase, I would expect it to announce a significant share buyback. program.

The current dividend obligation of $3/share equates to a yield of 0.78%. That being the case, while MPWR is showing significant dividend growth, in my view, the primary investment opportunity here is still capital appreciation.

Valuation

MPower currently trades at TTM P/E ratio of 48x and a forward P/E of 31x per Seeking Alpha. While this is likely a fairly rich valuation level, investors should consider the outstanding revenue and earnings growth that MPWR continues to deliver, its diversified end markets and geographic footprint, and its strong margin. Additionally, many of the markets in which MPWR has achieved design wins are relatively “tough”. That is, once an IC is tested, qualified, and gets a design win in, for example, an EV, it is relatively difficult to “unseat” that device, incurring the costs, risks, and time of redesigning circuits, retesting, requalify, etc.

Perhaps unsurprisingly, Seeking Alpha gives MPWR an “F” grade on valuation, as its TTM P/E is more than 2x the average S&P 500 company:

And the company gets a “D” for “revisions,” which I find somewhat amusing, since the rating seems to be based on fourth-quarter revenue guidance that’s a bit light, while the third-quarter report from per share itself revenue and earnings estimates with strong top and bottom line growth. Meanwhile, what matters most to me are the “A” ratings for growth and profitability, which MPWR has clearly earned.

Summary and Conclusion

I like this company – its broad portfolio and growth across multiple end markets, and its strong margin – all of which remind me of Broadcom. So does its dividend growth – which appears to have a long way to go. Although the current valuation is high, the company deserves it given its revenue growth of 57%+ in Q3 and its guidance to grow an estimated 45% in Q4. Given that MPWR earned $2.57/share in Q3 alone, and the current dividend obligation is only $3 annually, this bodes well for another significant boost in the quarterly dividend in February – which could be as much as $1.00/share be given the company’s strong financial performance in FY22.

That said, investors cannot ignore the market’s current negative sentiment and the macro environment of high inflation, higher interest rates and slowing global economic growth due to Russia’s war with Ukraine that has disrupted global energy and food supply chains and continues to ‘ a strong negative headwind for investors. If this is the case, my advice for investors who already own the stock is to continue to hold it, and for investors looking to establish a position to be patient to take advantage of market volatility and scale in MPWR with opportunistic buys on declines.

I close with a five-year stock price chart, noting that MPWR traded below $320 in October. I would snack on MPWR in the $340 range and if the stock were to drop back below $320 I would establish a full position. That’s why the company is on my personal watch list.