Monolithic Power Systems (MPWR) is an industry leader in the semiconductor space. The company develops and markets high-performance power solutions.
Specifically, Monolithic utilizes its deep system-level and applications expertise to design highly integrated monolithic systems employed in the computing and storage, automotive, industrial, communications, and consumer applications industries.
Monolithic’s mission is to lower total energy consumption in its customers’ systems with green, practical, and consolidated solutions.
The company’s results have been impressive for quite some time now. However, the stock had run a little bit ahead of itself back when it hovered near $580.
Given the stock’s recent correction and Monolithic’s continuously robust performance, I’m bullish.
Recent Performance
Monolithic Power’s latest results came in quite strong, with revenues growing by 44.4% year-over-year to $326.5 million. Growth was driven by the company’s diversified growth strategy, continuous innovation, investment in production capability, and overall ideal market conditions.
Particularly, Automotive revenues increased by 43.2% to $56.3 million, while Industrial revenues grew to $49.4 million, an increase of 33.1% versus the prior-year period.
Powered by excellent market dynamics (record demand for semiconductors), Monolithic has headed into 2022 on a strong note, expecting Q1 revenues in the range of $354 million to $366 million. At the midpoint of this outlook, it implies growth of 41.5% versus the comparable period last year.
As far as profitability goes, following vigorous top-line growth, EPS soared by 66.3% to $1.58. According to management’s Q1 guidance, the current market conditions, and the company’s expanding margins, I estimate FY 2022 adjusted EPS close to $8.50.
How to Value Monolithic
Investors should utilize Monolithic’s adjusted EPS when it comes to valuing the stock, as it is a more meaningful valuation and performance metric than GAAP EPS due to the company’s rich stock-based compensation levels.
Based on my estimate for FY 2022 adjusted EPS of $8.50, the stock currently trades at a (forward) P/E of around 45.6. This definitely sounds like a rich multiple, and it is. Especially considering it has already been adjusted for stock-based compensation.
However, based on the same catalysts that contributed to the latest quarter’s growth as described earlier, Monolithic should keep growing its EPS by a CAGR of at least 20% through the next 5-6 years. Hence, the stock should grow into its valuation relatively quickly.
This is also signaled through Monolothic’s over-confident dividend hikes. Along with its earnings report, the company announced a dividend increase of 25% to a quarterly rate of $0.75. In fact, the increase suggested acceleration from the previous hike, which was by a rate of 20%.
I would consider shares undervalued below a forward P/E of 40, ceteris paribus, as the projected EPS growth should more compensate for this multiple, in my view.
Wall Street’s Take
Turning to Wall Street, Monolithic Power has a Strong Buy consensus rating, based on the seven Buys assigned in the past three months. At $557.57, Monolithic Power’s stock forecast implies 44% upside potential.
Investor Takeaway
Monolithic Power has performed amazingly over the past several quarters. With record demand and backlog levels for its products, the only factor currently constraining the company is its capability to produce more.
While the stock appears rather pricey even following the recent correction, the company has a clear growth runaway ahead, which should lead to impressive EPS expansion as it scales its operations.
The stock is certainly not cheap. However, I believe that the upcoming EPS growth will eventually justify today’s multiple.
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