Monolithic Power Systems: Long-Term Revenue Growth Potential (NASDAQ:MPWR)

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Monolithic Power Systems (NASDAQ:MPWR) is a high growth tech story. In the last five years the company’s revenue has grown at a CAGR of 23%, driven by its expanding and highly demanding power product portfolio. I expect the company’s revenue will grow at a CAGR of mid-teens in the next five years due to lower demand from earlier phase related to market saturation, which is absolutely normal. Long-term investors can buy the company’s shares during pullbacks and market weakness.

Monolithic Power Systems offers high-performance, semiconductor-based power electronics solutions, which are energy-efficient, cost-effective, and easy-to-use. The company’s products are used in computing and storage, automotive, industrial, communications and consumer applications.

Growth Driver

Power Management ICs

Primary growth driver of Monolithic Power Systems is its power management ICs. The company makes ICs for computing and storage, automotive, industrial, communications and consumer markets. The company’s ICs offer high degree of integration and strong levels of accuracy and efficiency, which help the ICs beat competing products. In addition, the products are cost-effective relative to many competing products.

Monolithic’s DC to DC ICs generate maximum revenue within its power management ICs. These ICs are used to convert and control voltages within a broad range of electronic systems. They perform well in competitive environment since they offer high voltage operation, high load current, high switching speed and small footprint.

The company’s lighting control ICs generate significant revenue for the company. These ICs for backlighting are used in computers, notebooks, monitors, car navigation systems and televisions. In future, the company plans to introduce new products within this category. I expect the company will be able to boost its market share in this product line driven by features like power consumption control and longevity of the backlighting part of the devices.

According to a report:

  • The global power management integrated circuit (PMIC) market was valued at US$ 25.15 Bn in 2020
  • It is estimated to expand at a CAGR of 16.6% from 2021 to 2031
  • The global power management integrated circuit (PMIC) market is expected to cross the value of US$ 128.40 Bn by the end of 2031

I expect Monolithic’s power management ICs will drive its revenue growth significantly in the coming years.

Competition

Monolithic belongs to a highly competitive industry. Its competitors include ON Semiconductor (ON), STMicroelectronics (STM), Infineon Technologies (OTCQX:IFNNY), NXP Semiconductors (NXPI), and Diodes Incorporated (DIOD). Monolithic competes with these companies based on product quality and performance, product differentiation, and price.

Monolithic’s highly integrated power management ICs lead to fewer total components of the devices where they are used. As a result, the devices can be made smaller, lighter, and more efficient (due to lower heat generation). This is the main competitive advantage of the company. The company’s another competitive advantage is that its ICs are more integrated compared to many competing products. This leads to creation of energy-efficient, cost-effective, easy-to-use solutions for modern electronic devices. These competitive advantages ensure long-term revenue growth for the company.

First Quarter 2022 Financial Results

Monolithic’s revenue for the first quarter of 2022 was $377.7 million, a year-over-year increase of 48.4%. Non-GAAP net income for the quarter was $118.3 million and $2.45 per diluted share, compared to non-GAAP net income of $69.5 million and $1.46 per diluted share in the year-ago period. Net income grew 70% year-over-year, and EPS grew 68% year-over-year.

The company delivered strong results in the first quarter of 2022. Revenue increased substantially driven by robust storage and commercial notebook sales, continuing strength in data center and workstation computing sales, strong sales growth related to 5G build-outs and satellite communications, and excellent IoT business growth. Net income expanded driven by strong execution, and significant cost savings. The company pays sustainable dividend driven by consistent bottom-line growth with forward dividend yield of 0.76% and forward annual payout of $3.00. I expect dividend will increase due to strong growth in storage, workstation computing, and IoT revenue in the next five years.

Monolithic’s LED lighting drivers will see expanded demand in the next five years. According to a report:

The global LED lighting market size was valued at USD 55.5 billion in 2021 and is expected to expand at a compound annual growth rate (CAGR) of 10.5% from 2022 to 2030. Increasing construction activities in developed and developing countries, along with stringent government regulations to lower the adoption of inefficient lighting technologies, are the major factors expected to drive the market.

The report supports the fact that the demand for Monolithic’s LED driver ICs will continue to increase in the long-term, which will boost the company’s overall revenue growth.

Valuation

Monolithic’s competitors are ON Semiconductor, STMicroelectronics, Infineon Technologies, NXP Semiconductors, and Diodes Incorporated.

MPWR

ON

STM

IFNNY

NXPI

DIOD

Non-GAAP (FY1) P/E

33.56x

10.73x

9.46x

12.29x

11.25x

9.38x

TTM Price to Sales

13.41x

3.14x

2.21x

3.56x

1.55x

TTM Price to Cash Flow

51.58x

11.17x

8.57x

12.71x

8.52x

(Data Source: Seeking Alpha)

Monolithic is richly valued compared to its competitors. It has a balance sheet consisting of $260.6 million of cash and equivalents, and $5.8 million of debt. The company is a high growth story. In the last five years the company’s revenue has increased at a CAGR of 23%, due to which the company’s valuation is expensive. I expect in the next five years the company’s revenue will grow at a CAGR of mid-teens, driven by its highly demanding and diversified power management ICs. The company’s DC to DC ICs will continue to drive impressive revenue growth. In addition, its lighting control and LED driver ICs will support high revenue growth. Robust top-line and bottom-line growth will boost the company’s share price in the long-term. Utilizing the ongoing weakness in the market, the company’s shares can be bought gradually on pullbacks. I am bullish on the company in the long-term.

Assuming Monolithic’s revenue will grow at a CAGR of 16% in the next five years, I will find out the company’s long-term share price. The company’s trailing 12-month revenue is $1,331.10 million, and at a CAGR of 16% the company’s mid-2027 revenue will be $2,796.00 million, or $59.95 per share. In the last three years, the company’s shares have traded between the price to sales multiples of 10x and 25x. I expect in the next five years the company’s price to sales multiple will hover at a high of around 12-15x driven by high growth opportunities. Applying a price to sales multiple of 12x on Monolithic’s mid-2027 revenue per share, I get $719.40 as the company’s mid-2027 share price.

Risks

With technology evolving, the need to integrate the functionalities of various semiconductor components onto a single chip increases. If Monolithic’s customers need integrated solutions that the company doesn’t offer, the demand for its products could decrease. As a result, the company’s financial condition and results of operations could be negatively impacted.

The company’s success depends on developing differentiated products in the market. This results in generating above average gross margins by the company. If the company fails to develop differentiated products with higher gross margins than industry averages, its revenue growth and profitability could be adversely affected.

Conclusion

Monolithic’s differentiated power management ICs enjoy rising demand in the semiconductor marketplace. The company continuously diversifies its product portfolio to generate consistent revenue growth. In the long term the company is expected to perform well due to product differentiation. Long-term investors can buy the company’s shares on dips.

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