Monolithic Power Systems May Have Decided A Change In Direction Is Needed (MPWR)

Things have looked up for Monolithic Power Systems or MPS (NASDAQ:MPWR), a supplier of analog semiconductor-based power solutions. The stock has outperformed most semis with earnings growth staying resilient despite fears about an industry downturn. The stock has been trending higher in the last couple of months, but there is reason to believe change is coming. Why will be covered next.

The trend may have been broken

The year 2022 has been difficult for semiconductor stocks. Headwinds such as Fed tightening and a slowing market for semiconductors have resulted in big losses for many semis. MPWR is among them with the stock losing 26% of its value YTD. Still, that’s better than most with, for instance, the iShares Semiconductor ETF (SOXX) losing 33% YTD.

Many semis have seen their earnings decline due to a weakening market for semiconductors, but strong earnings growth from MPWR has contributed to the relative outperformance of the stock. In recent months, the stock has gotten an additional lift from increased expectations of a Fed pivot, which would, assuming it happens, remove a major factor that has weighed on semis.

This can be seen, for instance, in how the stock reacted with a gain of 12.5% on November 10, a day the stock market soared higher after the inflation numbers came in better than expected, which strengthened the case for a less restrictive Federal Reserve. The stock has been trending higher with buyers anticipating a change in Fed policy. The chart below shows how the stock has moved higher in the last few months.

In fact, a trend higher can be observed in the chart that has been in place since October. The lows have respected the boundary imposed by the ascending trendline. That is until very recently with the stock closing below the trendline on Friday at $367.03. The breakdown was accompanied by heavy volume, a bearish sign. The trend is still in force, but if the stock stays below the trendline for three consecutive trading days or more, the trendline will be considered to have been broken.

However, it’s worth mentioning that the stock bounced and closed way above the intraday lows after touching the 50-day moving average. Closing below the 50-day moving average would have been seen as a bearish sign, but the stock remains about 2% above the 50-day moving average. What happens in the next few days could be crucial.

The stock could still get back above the trendline, which would keep the trend intact. Alternatively, if the stock fails to recover and it falls below the 50-day moving average, the chart patterns will have decidedly turned from a bullish stance to a more bearish one. The stock could make it back to the low of the year, which is $309.20, set on October 14. If intraday lows are included, then the low is $301.69, set a day earlier on October 13.

It’s worth noting that the important 61.8% Fibonacci retracement level of the uptrend, starting with the March 2020 low of $135.22 to the November 2021 high of $570.59, is $301.53, which is within pennies of the 2022 intraday low of $301.69. The last time the stock got this low, the stock bounced. The stock could do it again.

But if support fails and the stock goes lower, the stock could conceivably fall to the lower trendline in the aforementioned chart, which has been in place since the first half of the year. This trendline is descending, which means the stock, depending on the timeline, could fall as low as the $220-260 region. The 76.4% retracement level can be found in this region at $237.97.

Why the stock could be destined to go lower

MPWR has benefited from talk of a Fed pivot, but hawkish comments from the Fed have sunk stocks in recent days. Furthermore, earnings growth has stayed resilient despite signs of a decline in semiconductor demand, but there are increasing signs that may not last. For instance, the latest guidance from Texas Instruments (TXN), a competitor of MPWR, suggests the weakness in semiconductor demand, which had previously been confined to the PC and smartphone market, is spreading to other market segments that had held up thus far.

MPWR’s own outlook suggests demand is starting to falter after staying resilient throughout the year. MPWR still beat estimates for the top and the bottom line in its most recent report, but guidance came in below expectations. Nevertheless, Q3 revenue increased by 7% QoQ and 53% YoY to $495.4M, which is a record high. Automotive revenue was a standout, increasing 42% QoQ and 60% YoY to account for 17.6% of total revenue.

GAAP EPS increased by 78% YoY to $2.57 and non-GAAP EPS increased by 71% YoY to $3.53. Note that EPS gains were held back by share dilution. The weighted-average of shares outstanding, GAAP or non-GAAP, rose to 48.29M in Q3 FY2022, up from 47.75M in Q3 FY2021. MPWR finished with cash, cash equivalents and investments of $738M on its balance sheet, which is less than the $814M in the preceding quarter, mostly as a result of a $170M pre-payment MPWR made during the quarter. The table below shows the numbers for Q3 FY2022.

(GAAP)	Q3 FY2022	Q2 FY2022	Q3 FY2021	QoQ	YoY
Revenue	$495.418M	$461.004M	$323.522M	7.47%	53.13%
Gross margin	58.7%	58.8%	57.6%	(10bps)	110bps
Operating income	$151.871M	$141.888M	$77.131M	7.04%	96.90%
Net income	$124.337M	$114.679M	$68.770M	8.42%	80.80%
EPS	$2.57	$2.37	$1.44	8.44%	78.47%
(Non-GAAP)
Revenue	$495.418M	$461.004M	$323.522M	7.47%	53.13%
Gross margin	59.0%	59.0%	57.8%	–	120bps
Operating income	$193.696M	$179.449M	$108.390M	7.94%	78.70%
Net income	$170.653M	$157.011M	$98.625M	8.69%	73.03%
EPS	$3.53	$3.25	$2.06	8.62%	71.36%

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Source: MPWR

However, while the latest earnings look fine, guidance was soft. Expectations were for Q4 revenue of $488M, but guidance calls for revenue of $450-470M, an increase of 36.7% YoY, but also a decline of 7.2% QoQ at the midpoint. Consensus estimates were revised lower as a result. Estimates now expect GAAP EPS of $2.45 and non-GAAP EPS of $3.15 in Q4.

In comparison, GAAP EPS was $1.51 and non-GAAP EPS was $2.12 a year ago. Earnings may thus decline sequentially, but they are still way up versus a year ago. FY2022 non-GAAP EPS is projected to be $12-35-12.53, up from $7.45 in FY2021. Consensus estimates project FY2023 non-GAAP EPS to end up at $11.25-14.77.

	Q4 FY2022 (guidance)	Q4 FY2021	YoY (midpoint)
Revenue	$450-470M	$336.5M	36.70%
GAAP gross margin	58.1-58.7%	57.6%	80bps
Non-GAAP gross margin	58.3-58.9%	57.9%	70bps

Click to enlarge

MPWR added some color to the outlook. It seems demand, which had remained strong up to now, is starting to falter. From the Q3 earnings call:

“For the prior six quarters, we have faced product shortages, especially in consumer, storage and computing. Now we have started to see our customers reduce their orders and push out shipments. We’ve experienced similar patterns in the past. We anticipate order patterns might oscillate in the near future. This is not a surprise to us. As a result of this change in ordering patterns, our inventory level will catch up to our target of 180 to 200 days and possibly be higher in the near term.”

A transcript of the Q3 FY2022 earnings call can be found here.

Valuations are still up there

MPWR is anticipating a slowdown, which is bad news since MPWR has long been assigned a premium for its superior growth, especially in comparison to the competition. The table below compares the multiples for MPWR with some of the more prominent competitors mentioned in the most recent Form 10-K. They are Analog Devices (ADI), Texas Instruments mentioned earlier, NXP Semiconductors (NXPI) and ON Semiconductor (ON), although they are by no means the only competitors out there.

	MPWR	ADI	TXN	NXPI	ON
Market cap	$17.23B	$84.96B	$153.88B	$42.43B	$28.27B
Enterprise value	$16.50B	$90.43B	$152.73B	$50.10B	$29.29B
Revenue (“ttm”)	$1,670.6M	$12,014.0M	$20,190.0M	$12,932.0M	$8,068.7M
EBITDA	$509.5M	$6,118.2M	$11,745.0M	$4,891.0M	$3,133.1M
Trailing GAAP P/E	45.32	31.78	17.77	16.32	17.00
Forward GAAP P/E	40.56	26.63	18.32	15.47	15.56
PEG ratio	0.56	0.61	0.79	0.20	0.11
P/S	10.22	7.21	7.73	3.33	3.51
P/B	11.26	2.33	10.64	6.00	5.00
EV/sales	9.87	7.53	7.56	3.87	3.63
Trailing EV/EBITDA	32.38	14.78	13.00	10.24	9.35
Forward EV/EBITDA	22.85	14.52	13.60	9.23	8.92

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Source: Seeking Alpha

In general, MPWR trades at higher multiples than others do. ON, for instance, compares favorably to MPWR. At the same time, it’s worth mentioning multiples have come down. MPWR used to trade well into the triple digits, but the combination of earnings growth and a falling stock price has brought them down to a certain extent. Still, MPWR trades at a premium, which may have been justified when MPWR was growing by leaps and bounds, but it is harder to do if or when growth starts to decline.

Investor takeaways

I remain neutral on MPWR as stated in a previous article. MPWR has a very strong track record in terms of growth going back many years and FY2022 is almost certain to be another year for the record books. FY2022 revenue is projected to grow by about 50% YoY and non-GAAP EPS by 66% YoY. Those are impressive looking numbers without a doubt.

However, FY2022 is expected to end on a soft note with the outlook suggesting demand is starting to falter. Industry peers like TXN are also seeing weakening demand. All signs suggest MPWR is unlikely to repeat its FY2022 performance in FY2023. Consensus estimates still call for growth in FY2023, but only in the single digits.

MPWR is heading for a downturn and it is not certain as to how long it will last. This could be problematic for a stock like MPWR that trades at a premium because of its superior growth. While MPWR is not as expensive as it used to be, multiples are still very much on the high side. There are other names out there that arguably offer better value compared to MPWR.

The charts suggest the stock is heading lower. The stock broke below the uptrend that had been in place for much of Q4. Odds are the stock is heading back to the 2022 low at around $300-310 set in early October, before expectations of a Fed pivot causes MPWR and other semis to rally. The stock could find support there, but it will have to trade lower to find out.

Bottom line, the odds are lower stock prices are in store for MPWR. The stock was kept afloat to a certain extent by resilient earnings growth and expectations of a Fed pivot, but the former is showing signs of cracking and the latter may not come to the rescue as some thought it would. Combine slowing growth, weakening demand, elevated multiples and a bearish chart outlook and the risk for MPWR is to the downside.