What happened
Shares of power-management chip company Monolithic Power Systems (MPWR +1.33%) rose 14.8% in May, according to data from S&P Global Market Intelligence. Granted, shares were down over 20% year to date at times in April, so the rally in May was just that: a recovery of losses from all-time highs. Nevertheless, the company started the month off right with a solid quarterly earnings update that had investors cheering.
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So what
Monolithic beat top- and bottom-line expectations. Revenue in the first quarter of 2022 increased at a sizzling 48% year-over-year pace to $378 million. Earnings per share increased 74% from the prior year, or 68% on an adjusted basis. Operating profit margin was a very healthy 25%. And the balance sheet showed cash and short-term investments totaled $774 million and zero debt at the end of March.
The guidance for the second quarter is solid. Management expects revenue of $420 million to $440 million, which implies year-over-year growth of at least 43%. The world is grappling with energy problems as fossil-fuel costs rise. One way to help solve the issue is by lowering the use of electricity. Tech and industrial equipment are big users of power, so figuring out new ways to boost efficient use of electricity is in high demand.
Monolithic, which has small and simple power-management designs on a single chip, is thus experiencing strong growth across its portfolio. Storage and computing chips are the biggest segment, comprising about one-quarter of sales. But data center usage is also fast on the rise. Power chip sales for enterprise data skyrocketed 162% year over year in the first quarter and made up 11% of sales.
Strong increases were also recorded for automotive applications and industrial equipment thanks to secular growth trends like electric vehicles and the Industrial Internet of Things.
Now what
Monolithic is an often-overlooked player in the semiconductor industry. Its chip designs compete against some big players like Analog Devices, top automotive chipmakers like NXP Semiconductors and ON Semiconductor, industry bellwether Texas Instruments, and others. Additionally, basic power chips like the kind Monolithic specializes in are a cyclical business. Years of boomtimes are often followed by slowdowns or sales contractions based on inventory supply and demand among customers.
In spite of this dynamic, Monolithic has provided market clobbering returns. The stock is up 2,540% over the last decade alone! The small-circuitry designer has pulled it off by delivering solid returns on invested capital and steadily rising free cash flow.
The only rub for me right now is valuation. Shares currently trade for 92 times trailing-12-month free cash flow and 34 times one-year forward expected earnings. With efficient energy solutions in high demand, investors have torrid growth already priced in. Nevertheless, if you think this trend will continue for years to come, put Monolithic Power Systems on your watch list.
