MPWR - Monolithic Power Systems: Leading The Charge In Analog Growth

2023-11-08 22:12:27 ET

Summary

• Monolithic Power Systems has consistently achieved faster growth compared to its peers in the analog and mixed-signal market.
• MPWR's Q3 revenue increased by 8% compared to the previous quarter, driven by Enterprise Data, Automotive, Storage, and Compute segments.
• MPWR has significant growth opportunities in the automotive sector, with a sizable Serviceable Addressable Market of $7 billion and $1 billion worth of design wins in its pipeline.

Thesis

Monolithic Power Systems, Inc. ( MPWR ) has a strong track record of execution and has consistently achieved faster growth compared to its analog and mixed-signal peers, thanks to its proprietary BCD process technology and deep applications expertise. The power management IC market has evolved, and currently, it is not a segment characterized by low margins and slow growth within the analog chip market. Rather, it's an increasingly profitable market, driven by a continuous stream of innovation. I remain positive on MPWR's positioning in the market and the growth trajectory of the company and assign a buy rating to the stock.

Q3 Review and Outlook

MPWR reported third-quarter 2023 revenue of $474.9 million, an 8% increase compared to the previous quarter but a 4% decrease YoY. This was in line with the guidance midpoint and the consensus estimate of $474.0 million. The growth was primarily driven by Enterprise Data, Automotive, Storage, and Compute segments, which performed well and gained market share. However, the gross margin fell slightly to 55.7%, which was below both consensus and guidance.

On a positive note, MPWR is performing well in the AI-related revenue segment, which is helping offset weaknesses in other areas. The company also had significant design wins in GPUs (NVIDIA, AMD, and others), CPUs (Intel, AMD), and EVs (mainly in China), which should drive growth in the second half of 2024. Looking ahead, MPWR's fourth-quarter 2023 guidance is in line with expectations. The company remains cautious about the near-term business environment, citing lower visibility compared to historical trends, although it has seen an increase in bookings and backlog. The management expects gross margin pressure to continue due to current demand conditions, and revenues for the fourth quarter and the first quarter of 2024 are expected to decline sequentially.

Power Management is an Evolved Space

Monolithic Power Systems specializes in designing and manufacturing high-performance analog and mixed-signal integrated circuits. Their primary products are power management ICs for DC-to-DC converters and lighting control devices. One of the key aspects that sets MPS apart is its ability to integrate advanced functionality onto a single chip or module, which enhances the company's products' performance and capabilities. The landscape of the power management IC market has undergone a significant transformation. It's a rapidly evolving and increasingly lucrative sector driven by continuous innovation. Unlike in the past, the growth of the PMIC market is not solely reliant on the quantity of units sold; instead, it benefits from higher average selling prices due to the integration of solutions at both the chip level (referred to as the monolithic level) and system level. Nowadays, a complete PMIC solution encompasses features like software programmability, associated embedded memory, microcontrollers for implementing PMIC-specific algorithms, and more. This ongoing cycle of innovation is evident in the companies' consistently above-average revenue growth over the past five years, primarily driven by higher average selling prices.

Automotive Opportunity is Growing

Monolithic Power has witnessed significant growth in its automotive segment, with approximately 17% of its revenues in FY22 coming from this sector, up from 13% in 2020. The company anticipates a sizable Serviceable Addressable Market ((SAM)) of $7 billion for automotive. Monolithic Power serves various automotive applications, including Advanced Driver Assistance Systems, Digital Cockpit, Body Control, Electrification, and Lighting. The company boasts a broad customer base in the automotive industry, with involvement in about half of the top 50 Tier 1 suppliers and engagement with most of the remaining ones. Notable Tier 1 suppliers that Monolithic Power collaborates with include Bosch, Continental, Autoliv, Marquardt, Magna, Novero, ZF, Panasonic Automotive, Aptiv, Harman, and Hella. Monolithic Power also works with several prominent automotive Original Equipment Manufacturers ((OEMs)), such as Volkswagen, BMW, General Motors, Toyota, Geely, Tesla, Ford, Renault, Nissan, Mada, Hyundai, and Mercedes. Additionally, Monolithic Power is continuously expanding its automotive product portfolio, which is expected to generate up to $400 per car in additional opportunities. Furthermore, the company has secured $1 billion worth of automotive design wins in its pipeline.

Valuation

Trading at a forward PE of 41.6x as per Capital IQ estimates, MPWR is trading significantly higher than the peer average. Although the multiple appears high compared to peers, the company has traded at an average forward PE of 44.x as per Capital IQ, which is above the multiple the stock is currently trading at, which is why there is still upside left from current levels. MPS shares usually command a premium attributed to several factors. Firstly, MPS has delivered a notably higher EPS growth rate, with a compound annual growth rate ((CAGR)) of 33% from 2017 to 2022. MPWR is currently benefiting from the strength of the AI sector, which has been instrumental in mitigating weaknesses observed in other segments of their business. Moreover, the company has secured significant design wins in crucial markets, including the GPU sector with major players like NVIDIA and AMD, as well as in the CPU sector with Intel and AMD, which bodes well for the company. These design wins are expected to gain momentum in the second half of 2024, resulting in a re-acceleration of MPWR's overall growth trajectory. Additionally, the company’s presence in the electric vehicle market, primarily in China, is poised for growth. Hence, I am optimistic on the company's growth trajectory, and assign the stock a buy rating.

Investment Risks

Monolithic Power Systems relies on third-party manufacturers (foundries) and assembly services for the production of their chipsets. The ability of these external partners to meet MPWR's demand and quality standards is largely beyond the company's control. If these partners fail to meet the required standards, it could lead to delays or deficiencies in MPWR's products, which may have a negative impact on the company's financial performance. MPWR operates in the highly competitive semiconductor industry, facing competition from various companies, including Microchip, Maxim Integrated Solutions, Texas Instruments, Analog Devices/Linear Technology Corporation, ON Semiconductor Corporation, NXP Semiconductors, and Power Integrations, Inc. Many of these competitors are substantially larger than MPWR and possess greater resources. MPWR must remain competitive in terms of product offerings, pricing, manufacturing capabilities, and talent to sustain its position in the market. Failure to do so could have adverse effects on the company's stock price.

Conclusion

MPS stands out as the fastest-growing company in the attractive analog sector. I anticipate that MPS will continue this trend by gaining market share, launching new products, securing design wins, and engaging in collaborative projects with top-tier customers. Given its superior growth prospects, I believe MPS should command a significant premium compared to its analog and mixed-signal peers. I remain positive on the company's growth prospects and assign a buy rating to the stock.

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