TXN - Monolithic Power Systems: Still On Hold

2023-09-22 01:27:32 ET

Summary

• Monolithic Power Systems got a temporary lift from record results at a high-profile customer, but the stock has now resumed declining, weighed down by declining earnings.
• MPWR has long outperformed by growing much faster than the market, but the streak of ten years of YoY quarterly growth came to an end in Q2 FY2023.
• Lack of growth is problematic for a stock like MPWR because it is priced for fast growth, which needs to be rectified if the stock is to avoid being repriced.
• Some might want to bet growth will return at MPWR, but others may want to take heed of why the stock has essentially gone in circles.

Monolithic Power Systems or MPS ( MPWR ), a supplier of analog semiconductors, did something that it has not done in ten years. Revenue shrank YoY in Q2 FY2023, the first time since Q2 FY2013. Demand is no longer as robust compared to say last year and it is possible demand could have further to slide. This could have consequences for a stock that has long been assigned a premium for its ability to outgrow the competition. Why will be covered next.

The stock continues to be volatile

A previous article from last February rated MPWR a hold for a number of reasons, including trading at multiples that were significantly higher than that of its nearest competitors. The article also noted how the stock had essentially moved in circles for quite some time, resulting in no real gains except for the few who got the highs and lows right. This is pretty much what the stock has done in the last seven months as shown in the chart below.

Note how the stock has gone up and down in the past seven months, only to wind up back to where it was in February. It's also back to where it was at the start of 2022. The stock is up a respectable 29.4% YTD with a stock price of $457.78 as of September 19, but that is down from a gain of 68.5% as recently as July when the stock posted a 52-weeks high of $595.98.

The July 2023 high was the culmination of a three month rally starting in May, which saw the stock appreciate by over 50% from the low in May to the high in July. This rally was triggered by record results from Nvidia ( NVDA ), which credited AI for the results. This set off a rally in many semiconductor stocks, including MPWR, a supplier to NVDA.

It's worth mentioning that the rally was preceded by a stock selloff in early May due to disappointing quarterly results from MPWR. What's interesting here is that the market paid more attention to the potential of AI as a tailwind to MPRW, which could help boost future results, than it did to current results. The latter clearly showed weakening demand, which had been strong up until fairly recently.

MPWR contracts for the first time in a decade

However, the AI-induced rally has run its course and the slide in the stock has resumed. The stock has lost 23.2% since the peak in July, yet multiples are still much higher than its closest competitors. According to the most recent Form 10-K , these competitors include Analog Devices ( ADI ), Texas Instruments ( TXN ), NXP Semiconductors ( NXPI ) and ON Semiconductor ( ON ) and several others. The table below shows how all these companies stack up against each other.

Source: Seeking Alpha

MPWR is assigned higher multiples than its competitors. This might be an issue for some, but an argument can be made that MPWR deserves a higher multiple than the competition because of its superior growth. For instance, while the analog market grew by 20.1% YoY in 2022, MPWR grew by more than twice the rate at 48.55%. This is likely to remain the case in 2023. It depends on what happens in the rest of the year, but MPWR's 2023 revenue is on track to remain flat YoY, which is better than the decline in the high single digits for the analog market.

Granted, MPWR is a relatively small company, certainly in comparison to analog players like TXN, which makes it easier to grow fast. Still, MPWR has an impressive track record of sustained growth. For instance, heading into 2023, revenue had grown YoY every single quarter for the last ten years with the exception of Q2 FY2013. The last year MPWR did not manage to increase revenue YoY was FY2011. Revenue grew from $197M in FY2011 to $1,794M in FY2022.

However, the streak came to an end in Q2 FY2023 when revenue declined by 4.3% YoY to $441.1M, the third consecutive sequential decline and the first time revenue shrank YoY since Q2 FY2013. GAAP EPS was $2.04 and non-GAAP EPS was $2.82, both down YoY. The table below shows how the numbers for Q2 FY2023 declined QoQ and YoY.

Source: MPWR

Guidance calls for Q3 FY2023 revenue of $464-484M, a decline of 4.3% at the midpoint. This would be the second consecutive YoY decline in quarterly revenue, the first time since FY2011. It's also an increase QoQ, but keep in mind that this is for the third quarter which tends to get a boost from seasonality. Margins are expected to decline and based on this, non-GAAP EPS is estimated to be around $3.00-3.10 in Q3 FY2023, less than the $3.53 in Q3 FY2022.

MPWR has taken note of increased volatility in ordering patterns. A number of customers have, for instance, opted to delay their orders or otherwise make changes to their order patterns. Presumably, this is due to customers having doubts about the health of end-user demand. This has lowered visibility for MPWR, certainly in comparison to the recent past when MPWR had plenty of orders it could count on.

Furthermore, MPWR seems to be suggesting that the recent decline in demand may get worse. For instance, the automotive segment has outperformed for a long time at MPWR, going from 1.9% of total sales in FY2010 to 23.6% in the most recent quarter, way ahead of all other market segments. However, MPWR is now seeing some softness in this segment. From the Q2 FY2023 earnings call:

And one other thing to add, and this is specific to MPS, not necessarily a broader comment at the general market, but automotive came in a little bit lower than would have been expected. And as we look at the ramp in the second half, we're observing that at least for two of our customers, unit volumes appear to be lower, and we had two product launches which have been delayed into Q4 and to Q1."

A transcript of the Q2 FY2023 earnings call can be found here .

Why some may still want to be long MPWR and why perhaps not

The top and the bottom line have gone in the wrong direction for the last three quarters and guidance expects this to continue. The stock has essentially stalled. However, there are a couple of reasons why some may consider going long MPWR, especially after the big decline in the stock after the July high.

For instance, MPWR continues to outperform in 2023 as mentioned earlier, even during the current downturn. In addition, there is a widely held belief that the semiconductor market will return to growth in 2024. Still, it's worth mentioning that forecasters have been forced to lower their forward projections because the semiconductor market has been weaker than expected all year. Nevertheless, the general expectation is that demand will recover and the market will expand in 2024. This includes the analog market, which should help MPWR, especially with its ability to outperform the overall market.

However, it's also worth mentioning that MPWR may be trading above fair value, even if fair value is a subjective term. For instance, non-GAAP EPS grew from $3.74 in FY2018 to $12.41 in FY2022, which represents a CAGR of about 35%. If we extrapolate this level of earnings growth by assuming that MPWR will overcome current headwinds hampering growth and that MPWR will grow as fast in FY2022-2026 as it did in FY2018-2022, then fair value for MPWR is around $438 with MPWR earning $12.52 TTM.

This is below the stock's current price of $457.78, which suggests the stock is somewhat overvalued. Note that a fair value of $438 is close to the midpoint between the 52-weeks low of $301.69 and the 52-weeks high of $595.98, which is $448.84. It might also help explain why the stock has spent a lot of time in the $400-450 region in the past couple of years, which makes sense if this is where fair value can be found.

There's also reason to question whether MPWR will be able to grow as fast in the coming years as it did in recent years. The past few years saw the market flooded by trillions of stimulus, which greatly inflated demand for everything, including for semiconductor chips. This level of stimulus will be not be around in the coming years, which could make it harder for MPWR to grow as fast as in recent past.

Investor takeaways

I was neutral on MPWR earlier in the year and I remain so after seven months. The stock has seen a lot of volatility in recent months, but the stock price is now a few percentage points below where it was in February, essentially validating the neutral stance on MPWR. The stock is also back to where it was in early 2022, which means anyone who went long then has not much to show for the last two years or so.

The stock has not managed to gain in recent months, especially if the AI-induced rally from May-July is excluded. This rally was arguably excessive. It's true MPWR is a supplier to NVDA, which suggests it stands to benefit if the latter sees record sales, but NVDA is just one of many customers. Most customers are not in the same boat as NVDA as they are dealing with soft demand for the most part, which is why quarterly results have been on the decline at MPWR.

Growth was long something you could count on at MPWR, but the streak of YoY growth quarter after quarter came to an end in Q2 FY2023 after exactly ten years. Guidance calls for revenue to shrink YoY once again. This is problematic for a stock like MPWR because the stock is assigned higher multiples due to its demonstrated ability to grow fast and on a sustained basis.

MPWR arguably deserved higher multiples when it was growing by leaps and bounds, including as recently as FY2022 by 48+% or more than twice as fast as the market, but this argument is much harder to justify if MPWR is no longer growing or even contracting. A non-GAAP P/E ratio in the high thirties was easier to stomach when MPWR was growing in the high forties like last year, but not when sales and earnings are flat to down.

Bottom line, some may still be long MPWR based on the assumption that growth will accelerate, possibly as soon as next year. However, MPWR is priced for fast growth, which is not the case right now. MPWR needs to achieve much better growth rates than it has recently as that is what is priced into the stock. The previously mentioned fair value of say $438, for instance, assumes EPS grows by 35% on average per year. If MPWR is no longer growing as fast as before, the stock price needs to come down. That's the bottom line.

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