Monolithic Power Systems (MPWR)
Monolithic Power Systems MPWR 0.00%↑ (MPS) makes entire power management systems on a single chip.
Quality (3/5)
MPS’s sales increased dramatically in recent years, posting a 10-yr CAGR of over 20%. While this high growth is not sustainable forever, with <$2B of annual revenue, it could sustain longer than investors think. Peers Analog Devices ADI 0.00%↑ and Microchip MCHP 0.00%↑ have around $10B of annual sales, while the biggest semiconductor companies do anywhere from $30 to $50B of sales today.
Management says its growth is sustainable due to:
continuous investment and diversification of supply chain, ahead of market demand
accelerated release of advanced products and solutions, based on leading technology
increased acceptance of solutions with first-tier customers globally
diversification and support of a wider number of end product applications
Only 6% of total revenue is based in the United States, according to the latest 10-K. MPS’s largest market is Asia, accounting for 86% of revenue. However, management says actual “end customers” are located 36% in the US. In addition, MPS’s largest customers are third-party distributors, accounting for the majority of revenue, but its largest “end customer” makes up <5% of total revenue. MPS has a strong track record for growth, with its last YoY revenue decline (LTM) in 2011. The company is on seven consecutive annual dividend increases, currently yielding 0.69%. Management does not use excessive leverage. Total assets / total equity is consistently around 1.2X.
Visibility (2/5)
While MPS lacks short-term visibility due to the cyclical nature of the semiconductor industry, management’s focus on business-to-business (B2B) markets is increasing longer-term visibility. These markets have longer lifecycles than Consumer markets. Many years ago, products like Microsoft’s Xbox or laptop computers were driving sales. Consumer was 65% of total revenue. Today, MPS is in Cloud data centers, GPUs, electric automobiles, factory automation, robotics, and much more. CEO Michael noted in 2021 that they had “too many opportunities”! Consumer is now about 13% of revenue.
The chart above is from my public Tableau which tracks MPS’s quarterly trends. B2B revenues were over $400M in the latest quarter, up from less than $100M per quarter about five years ago!
MPS’s business is not simple or boring, in my view. I understand that customers want chips that are small, high performance, and use low amounts of heat, but I do not fully understand the technology behind it or the TLAs. I am sure there are electricians and semiconductor industry people that know a thousand times more than me about this tech. A 45V, 2A, Low-IQ, Synchronous Step-Down Converter does not mean anything to me, but it could make others very excited.
As far as MPS’s financials, the main complexities are stock-based comp adjustments (almost 10% of total revenue) and foreign sales. There have been short-seller attacks in the past about MPS’s China exposure.
Management (4/5)
Michael Hsing, 63 years old, is the Founder, CEO, and Chairman of the Board. This creates a bit of “key man” risk, meaning if Michael decides to retire or he falls off cliff, then the future of the company could be in question. It would be nice to see the company demonstrate that there are other capable leaders on the team.
Over the last decade, MPS delivered $1.2B of free cash flow and an impressive median ROIC of 30%. My ROIC analysis is also on my public Tableau.
Management has only done one acquisition for ~$12M, which never seemed to materialize into anything, so essentially all growth has been organic as a result of strong research & development and capex spending. Management did a well-timed (although it was criticized initially) capacity expansion right before the pandemic, which allowed it to meet high demand and win over new customers.
MPS has not done a lot of share repurchases, except for ~$100M between 2013-2015. In Q3 2023, management announced a larger repurchase program:
Demand Creation (5/5)
MPS has very high demand creation ability, including growing 10%+ better than the industry during downturns. The company claims to have leading BCD (Bipolar-CMOS-DMOS) technology. I am not the best person to explain this, so I found a brief article on the subject here.
After ICs were introduced in the 1950s, several variations of the technology emerged: those based on bipolar transistors, invented in the 1950s; CMOS in the 1960s; and double-diffused metal oxide semiconductors (DMOS) in the 1970s. But in the early 1980s, some applications demanded all three kinds of chips—which required higher voltage and chips with faster switching speeds.
STMicroelectronics invented BCD tech, but MPS is the leading company focused on it today. Due to this BCD tech, MPS’s chips have higher performance, better heat-management, and smaller package sizes than its competition. These chips are a small percentage of a customer’s overall project cost, yet highly critical to the user experience. It can enable the customer’s product to be better than their competitors.
Once a customer designs in an MPS power management chip, they are unlikely to switch due to high costs. One would have to find a new supplier and completely redesign the application around the new chip. That would be a huge time waste and dollar cost, plus the end product would not be as good as it would be if it had an MPS chip. From what I understand, imagine designing a cloud data center rack. MPS comes along and says, “this chip is all-in-one, higher performance, less heat, etc.” and its about $150 out of your total rack cost which is in the thousands of dollars. If you do not use the MPS chip, your rack will be slower and require more cooling (making it overall, more expensive), only to try to save a few bucks upfront. It would not be worth it. There are many more use-cases on MPS’s website.
Valuation & Pricing (1/5)
Attached below is my discounted cash flow analysis:
My estimated value comes out to be $284/share, which is half of the current stock price. I have always been way too conservative on this stock. I set revenue growth of “only” 12.5% over the next two years because I worry that B2B markets will slow down after the huge pandemic rush to buy chips. Peer Microchip just came out and said revenue was going to be down over 20% sequentially.
The weakening economic environment that our customers and distributors faced during the December 2023 quarter resulted in many of them wanting to receive a lower level of shipments as they took actions to further de-risk their inventory positions," said Ganesh Moorthy, Microchip’s President and Chief Executive Officer. "Many customers also had extended shutdowns or closures at the end of the December quarter as they managed their operational activities. The impact of these and related factors was that certain backlog that we had planned to ship when we provided our guidance on November 2, 2023 did not ship to customers before the end of the December quarter. As a result, our preliminary revenue indication for the December 2023 quarter is to be down sequentially about 22% compared to our guidance of down 15% to 20%, which we provided on November 2, 2023.
While I do not see large YoY revenue declines for MPS, I just do not see how they can keep growing over 20% over the next 12-18 months. When I get out to year three, I set revenue to accelerate back above the long-term 20% rate. I end up with over $8B of revenue with 35% EBIT margins. It could actually turn out to be $10B+, which is where I think I will most likely go wrong in my assessment.
My cost of capital is high at 14% due to the risky semiconductor market and high Asia revenue exposure. MPS’s large use of SBC also takes a chunk of value away.
In terms of pricing, MPS is the most expensive stock in the peer group, currently at a 50X forward P/E.
The 50X P/E assumes that you use the non-GAAP EPS, which adds a large amount of SBC to arrive at an adjusted EPS. This seems like an enormous P/E ratio, but with how fast MPS grows earnings, it could look like nothing in a matter of years.
I looked back at my notes and saw that I did not want to pay 32X earnings for MPWR stock in 2018. “Too expensive!” “Too much SBC!” Earnings were $3.75/share back then compared to about $11.00 today. Even if I back out SBC, that would still be about $120/share on $9.00 of future earnings, or 13X.
As Founder & CEO Michael gets older, there may be a higher chance that he is willing to sell the company, which could give the stock a premium price.
According to Koyfin Charts, MPWR is near the 90% percentile across the board for pricing multiples compared to itself, the US tech market, and the US market in general.
I think a 35X P/E on $11.00 of earnings is fair today, leaving a price of $385.
Combining my valuation and pricing, my target buy-below price is $335, which is 44% below the price today. The last time the stock traded below $350 was late 2022. It recently just ran from $400 to $650 at the end of 2023.
Risks
What could possibly go wrong? I mentioned the “key man” risk, China exposure, and potentially slower B2B revenue already. In addition to these, as MPS gets larger, I could see the risk of a larger peer, especially Analog Devices, try to grab some of this high growth from MPS. ADI is typically distracted with integrating its large acquisitions, but there must be some folks inside the company that see the growth MPS is experiencing and wanting a slice of it for themselves. I do not think CEO Michael is willing to sell MPS today, so ADI could use its larger engineering force and cash flow to match MPS’s technology.
To conclude, Monolithic Power Systems scores a 15/25 in my latest review of the company. See where it stacks up with the other companies I follow, now on Tableau!
Thank you for reading! Please share your thoughts below.
More on MPS in my Q3 2023 earnings updates:
Disclosure:
I do not own MPWR stock. Please see my holdings disclosure located in the Google Sheets link.
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