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Monolithic Power Systems: Still On Hold

Monolithic Power Systems: Still On Hold

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Monolithic Power Systems (MPS), a leading supplier of analog semiconductors, recently experienced a decline in revenue for the first time in ten years. In Q2 FY2023, revenue contracted year-over-year (YoY) for the first time since Q2 FY2013, signaling a potential downturn for the company. This reversal of fortune could impact a stock that has traditionally commanded a premium due to its strong growth potential. Let’s explore the reasons behind this slump and its implications for investors.

The stock’s volatility persists

Earlier this year, MPWR was rated as a hold due to its high valuation compared to competitors. The stock has shown a lack of sustained gains, oscillating within a range despite a brief surge in July. The chart below demonstrates its performance over the past seven months.

As observed, MPWR’s stock has fluctuated but ultimately returned to its February 2022 level. While it has shown a respectable year-to-date increase of 29.4%, it has declined from its July high of $595.98 by 23.2%.

The July rally was ignited by positive results from NVIDIA (NVDA) attributing its success to artificial intelligence (AI), which in turn drove up the semiconductor stock market, benefiting MPWR as a supplier to NVDA.

It’s worth noting that this rally followed a stock selloff in May caused by MPWR’s disappointing quarterly results. The market, however, focused more on the potential of AI as a growth catalyst for MPWR, overshadowing the company’s weakening demand at that time.

MPWR faces declining demand after a decade of growth

Unfortunately, the AI-driven rally has lost momentum, and MPWR’s stock has resumed its decline. Despite having higher multiples compared to competitors such as Analog Devices (ADI), Texas Instruments (TXN), NXP Semiconductors (NXPI), and ON Semiconductor (ON), MPWR’s revenue continues to decline.

According to its most recent Form 10-K, MPWR’s revenue for Q2 FY2023 decreased by 4.3% YoY to $441.1 million, marking the third consecutive sequential decline. This is the first YoY revenue shrinkage since Q2 FY2013.

MPWR’s weak performance is further highlighted by its Q3 FY2023 revenue guidance of $464-484 million, representing a YoY decline. This is the first instance of two consecutive quarterly YoY revenue declines since FY2011.

The decline in demand is even affecting MPWR’s historically strong automotive segment, which outperformed other market segments for years. As stated in the Q2 FY2023 earnings call, MPWR experienced lower-than-expected performance in the automotive sector due to decreased unit volumes and delayed product launches.

Investor considerations for MPWR

While some investors may see potential in MPWR’s resilience and anticipate a recovery when the semiconductor market improves, caution is warranted. Forecasts for the semiconductor market have been revised downward consistently throughout the year, as demand has been weaker than expected.

It is worth acknowledging that MPWR may be trading above its fair value, given its current growth slowdown. Extrapolating its past earnings growth rate may not be realistic, as the company may struggle to achieve the same level of growth in the coming years, especially without the stimulus-driven demand experienced recently.

Considering the factors mentioned above, it is prudent for investors to adopt a neutral stance towards MPWR. Although the stock has seen volatility and largely failed to generate significant returns, it remains priced for high growth that is not currently being realized. For MPWR to maintain its premium valuation, it needs to demonstrate stronger growth rates than what it has shown recently.