2023-04-26 05:24:32 ET
Summary
- POWI has seen its earnings collapse, but the outlook is calling for an imminent upturn that will gradually increase in strength.
- Earnings projections are calling for a fairly quick return to the record highs, but there is reason to think this may be too much to ask for.
- The stock has been weak lately and it could challenge the recent lows if POWI’s forecast turns out to be overly optimistic once more.
- Some may want to roll the dice based on POWI’s promise of an upturn, but one should think twice before doing so.
Power Integrations ( POWI ) has not been the same since Q1 guidance disappointed. POWI admitted its prior outlook had been too optimistic, which could have repercussions in the future. The stock was trending higher, but this has come to an end, certainly after the stock broke through support. The weakness persisted despite some upbeat analyst commentary in support of the stock. Furthermore, POWI stock could have further to go, especially with the industry showing signs the downturn could last longer than anticipated. Why will be covered next.
POWI rallied based on a mistaken outlook
POWI, a supplier of high-voltage power semiconductors, was defying the skeptics for a while. The company has seen its earnings collapse in recent quarters due to falling chip demand, yet the stock managed to cast it all aside by continuing the uptrend that started last year as shown in the chart below. Note how, for instance, the stock soared higher after November 2, 2022, even though earnings guidance that day came in way below expectations.
The stock continued to rally in 2023, eventually reaching an intraday and 2023 high of $91.98 on February 3. This gave POWI a gain of 28.2% for the year at that point. However, gains have come down to just 5.8% YTD because the stock has since wavered in strength. In comparison, most semiconductor stocks have done better with the iShares PHLX Semiconductor ETF ( SOXX ) up 19.2% YTD. The stock has clearly not been the same since February 6, which is when POWI released its Q4 and FY2022 report.
The stock fell over 10% at one point on February 7, although it was able to recoup most of the losses before the end of the day. Still, the stock never regained the momentum it had prior to the report’s release. In addition, the weakness in the stock resulted in it falling below the ascending trendline that marked the uptrend starting last year. Note now the trendline was able to provide the stock with support for a while, only for the decline to accelerate after April 4 once the stock broke through support.
The stock has now fallen below the 200-day moving average and it could be targeting a retest of the lows in October and November 2022. Keep in mind that the stock bottomed at $60.01 on October 13 and at $59.16 on November 3, thereby concluding the downtrend that started after the stock peaked in November 2021.
POWI should be able to find some measure of support in the $59-61 region. If it was able to find support before, then it can always happen again. If the stock does get there, it would complete a 100% retracement of the move up from the November low of $59.16 to the February high of $91.98, a gain of around 55%. Still, the stock would have to drop by another 20% or so to reach this region of support.
What seems to be bothering POWI
It’s interesting to note how the market reacted differently to the two most recent earnings reports. The one in November triggered a rally and the one in February resulted in a selloff. Keep in mind that POWI disappointed both times with guidance that was well below expectations, yet the response was the exact opposite. There is a reason for this.
POWI was able to offset disappointing Q4 guidance during the November call by suggesting that the quarterly numbers would not get worse beyond Q4. Q1 was expected to be similar to the preceding Q4, followed by a gradual recovery. From the Q3 FY2022 earnings call:
“So going to Q1 quarter, our best estimate is we would be similar to Q4 and then Q2, our expectation is that it’ll be incremental growth, but second half is where we expect a stronger demand as this downturn turns into an upturn. That’s our best estimate right now.”
A transcript of the Q3 FY2022 earnings call can be found here .
This outlook that suggested the numbers would not get any worse compared to Q4 got a big thumbs up from the market. So even though Q4 guidance of $120-130M from POWI was well below the $160M expected, POWI managed to not only avoid backlash from weaker-than-expected guidance, but it also managed to trigger a multi-month rally in the stock with an outlook that suggested an upturn was on the horizon.
However, it turned out that POWI was premature in calling for a bottom because its Q1 guidance in February came in well below expectations. Guidance called for Q1 revenue of $100-110M as shown in the table below, which is not only worse than Q4’s $125M, something that POWI had said would not happen, but also below market expectations of $127M.
Q1 FY2023 (guidance) | Q1 FY2022 | YoY (midpoint) | |
Revenue | $100-110M | $182.1M | (42.34%) |
GAAP gross margin | 53.0% | 55.3% | (230bps) |
Non-GAAP gross margin | 53.5% | 55.7% | (220bps) |
Source: POWI Form 8-K
Earnings estimates have been lowered accordingly with consensus now expecting GAAP EPS of $0.12 and non-GAAP EPS of $0.25 on revenue of $105M in Q1. In comparison, the table below shows the numbers in previous quarters. It’s clear the top and the bottom line are in a state of decline.
(Unit: $1000, except EPS) | |||||
(GAAP) | Q4 FY2022 | Q3 FY2022 | Q4 FY2021 | QoQ | YoY |
Revenue | 124,770 | 160,233 | 172,654 | (22.13%) | (27.73%) |
Gross margin | 54.0% | 57.4% | 54.0% | (340bps) | - |
Operating margin | 16.7% | 30.2% | 25.7% | (1350bps) | (900bps) |
Income from operations | 20,892 | 48,371 | 44,304 | (56.81%) | (52.84%) |
Net income | 22,815 | 45,964 | 40,700 | (50.36%) | (43.94%) |
EPS | 0.40 | 0.80 | 0.66 | (50.00%) | (39.39%) |
(Non-GAAP) | |||||
Revenue | 124,770 | 160,233 | 172,654 | (22.13%) | (27.73%) |
Gross margin | 54.7% | 57.8% | 54.5% | (310bps) | 20bps |
Operating margin | 22.5% | 32.4% | 32.0% | (990bps) | (950bps) |
Income from operations | 28,028 | 51,871 | 55,321 | (45.97%) | (49.34%) |
Net income | 27,866 | 48,348 | 50,917 | (42.36%) | (45.27%) |
EPS | 0.48 | 0.84 | 0.83 | (42.86%) | (42.17%) |
Source: POWI Form 8-K
Note that similar to what it did before, POWI has once again predicted the numbers won’t get any worse. POWI is calling for Q1 to be the bottom and sequential growth in Q2. From the Q4 earnings call:
“We are now into our third quarter of sequentially lower revenues and channel inventories are declining after peaking in the September quarter. While the slope of the recovery will, of course, depend on the strength of the end market demand, we do expect revenues to bottom in the March quarter, followed by a sequential growth in the June quarter.”
A transcript of the Q4 FY2022 earnings call can be found here .
Keep in mind that earnings estimates are counting on that upturn that POWI promised. Estimates project non-GAAP EPS of $1.68-2.20 on revenue of $535-570M by the time FY2023 is over, which imply earnings of $1.43-1.95 in Q2-Q4 if Q1 EPS is $0.25. These numbers represent YoY declines of 33.13-48.94% and 12.46-17.84% respectively.
The numbers are expected to get better with estimates projecting non-GAAP EPS of $2.63-3.10 on revenue of $635-715M in FY2024, which is not far from the record highs in FY2021-2022. The table below shows the FY2022 and FY2021 numbers for comparison.
(Unit: $1000, except EPS) | |||
(GAAP) | FY2022 | FY2021 | YoY |
Revenue | 651,138 | 703,277 | (7.41%) |
Gross margin | 56.3% | 51.3% | 500bps |
Operating margin | 27.7% | 24.9% | 280bps |
Income from operations | 180,412 | 175,058 | 3.06% |
Net income | 170,851 | 164,413 | 3.92% |
EPS | 2.93 | 2.67 | 9.74% |
(Non-GAAP) | |||
Revenue | 651,138 | 703,277 | (7.41%) |
Gross margin | 56.8% | 52.0% | 480bps |
Operating margin | 31.6% | 30.7% | 90bps |
Income from operations | 206,075 | 215,915 | (4.56%) |
Net income | 191,932 | 200,226 | (4.14%) |
EPS | 3.29 | 3.26 | 0.92% |
Source: POWI Form 10-K
Why the outlook may still be too optimistic
While earnings estimates have come down, they may still be too optimistic for a couple of reasons. For starters, business conditions may not improve as much as expected in H2 2023. Granted, the outlook from POWI calls for exactly that, but don’t forget POWI did get it wrong before. There are no guarantees POWI is not once again being overly optimistic in its outlook.
For instance, the smartphone market has been weaker than expected. A recent forecast from IDC, for example, lowered its 2023 outlook from an increase of 2.8% to a decrease of 1.1% in terms of the number of smartphone units shipped. Keep in mind that a large part of what POWI supplies are AC-DC power supplies, which convert high-voltage AC power from wall outlets to low-voltage DC required by many electronic devices, smartphones in particular.
However, besides weak demand for consumer products like smartphones, there’s another reason why asking for a return to the record highs in FY2021-2022 may be too much to ask for. As pointed out in a past article from late 2021, there is reason to be skeptical of POWI’s recent growth. For instance, POWI’s sales in the record-setting FY2021 grew by an amount that exceeds the total growth in FY2010-2020.
For POWI’s growth in one year to exceed the total of the ten preceding years combined is very unusual. It strengthens suspicions that recent sales growth was not only due to real demand, but also due to inventory building. For POWI to struggle with excess inventory in recent quarters lends further credence to this hypothesis.
The inventory building could have been particularly acute in China, a country which accounted for 54.8% of POWI’s FY2022 sales. Note that China has been largely responsible for recent sales growth. For instance, when sales spiked higher in FY2021 as mentioned earlier, China accounted for $140M of the $215M increase in sales that year. In comparison, total revenue grew from $300M in FY2010 to $488M in FY2020, an increase of $188M over the span of 10 years.
There were a couple of reasons why China would have wanted to increase inventories. The COVID-19 pandemic led to widespread supply chain disruptions and to keep production running smooth companies wanted to keep more inventory around. China may also have been motivated to order more from POWI due to possible trade restrictions between the U.S. and China.
What this all means is that POWI is unlikely to see the record sales that it saw in FY2021-2022 anytime soon. The extreme conditions associated with the pandemic are no more. There is no need for extra inventories. The stimulus that resulted in increased demand for electronic devices is no more. The record highs seen in FY2021-2022 were made possible by exceptional circumstances that are no more.
Why the stock could breach the recent lows
If POWI does not return to the record earnings seen in FY2021-2022 as earnings projections expect it to, then POWI may be overvalued with multiples where they are. Remember, POWI is projected to come close to the record earnings from FY2021-2022 in FY2024. But if earnings stay depressed, then POWI looks rather expensive as shown in the table below. In general, multiples are higher than most semis. A premium is arguably justified if there is a strong upturn soon, but not if earnings stay where they are at the moment. If earnings and multiples stay where they are, the stock could go lower.
POWI | Sector median | |
Market cap | $4.34B | - |
Enterprise value | $4.00B | - |
Revenue (“ttm”) | $651.1M | - |
EBITDA | $219.0M | - |
Trailing non-GAAP P/E | 23.15 | 17.92 |
Forward non-GAAP P/E | 37.51 | 19.36 |
Trailing GAAP P/E | 25.91 | 21.90 |
Forward GAAP P/E | 48.61 | 24.71 |
PEG GAAP | 2.66 | 0.61 |
P/S | 6.74 | 2.68 |
P/B | 5.73 | 2.85 |
EV/sales | 6.14 | 2.76 |
Trailing EV/EBITDA | 18.26 | 13.90 |
Forward EV/EBITDA | 26.50 | 13.34 |
Source: Seeking Alpha
Investor takeaways
While some may want to bet on long POWI with its outlook calling for an upturn soon, I am neutral on POWI. Not only has POWI shown it can be way off in its forecasts, but there is reason to believe earnings projections and valuations by extension may be too high. Earnings estimates are counting on an imminent upturn that may not be coming anytime soon.
While the sequential decline in the top and the bottom line is likely to come to an end, if only because they have already fallen by so much in recent quarters, a rapid return to the heady days of FY2021-2022, as earnings projections call for, could be too much to ask for. Those numbers were made possible by exceptional circumstances that are highly unlikely to be repeated anytime soon.
This is not to say POWI can’t grow, expand its markets or one day return to the record highs. It’s just going to take longer using real demand only. POWI’s growth in the coming years is unlikely to resemble the one in FY2021-2022, but more like the ones in the preceding years. That is growth that is much slower than people are expecting from POWI.
The reality is that the current environment does not favor a strong upturn for POWI. Consumer demand for things like smartphones is down for several reasons, including weak economic conditions. POWI needs to find something else to replace the factors that drove growth as seen in FY2021-2022. At this time, there does not seem to be anything out there that could come close as a replacement.
Bottom line, the risk is to the downside. Those going long have to bet that the strong upturn that POWI has been calling for shows up as promised. Because if it does not, then POWI could very well retest the 2022 low and quite possibly break it.
For further details see:
Power Integrations: Why Expectations May Still Be Too High