Key Takeaways

Introduction of innovative products in clean energy and automotive sectors positions the company for future revenue growth and improved net margins.
Share repurchase program and increased dividends indicate strong capital return strategies enhancing shareholder value and driving earnings per share growth.
Fluctuating demands and project delays, compounded by competitive pressures and execution risks, could lead to revenue instability and challenges in sustaining market share for MPS.

Catalysts

About Monolithic Power Systems

Designs, develops, markets, and sells semiconductor-based power electronics solutions for the storage and computing, automotive, enterprise data, consumer, communications, and industrial markets.What are the underlying business or industry changes driving this perspective?

Monolithic Power Systems introduced silicon carbide inverters for high-powered clean energy applications, with additional revenue expected to ramp in late 2025, indicating potential for significant future revenue growth from new product lines.
The development of automotive audio products utilizing DSP technology and new notebook battery management solutions positions the company for increased revenue in the automotive and consumer electronics markets, potentially improving net margins through high-value innovations.
The company's focus on innovation with high-accuracy 24-bit analog to digital converters expected to ramp in the second half of 2025 may result in substantial earnings growth as these products offer high-performance solutions in industrial applications.
A new $500 million share repurchase program and an increase in dividends reflect capital return strategies that could drive earnings per share growth, enhancing shareholder value.
Engagement with multiple hyperscale companies and potential involvement in AI projects significantly positions Monolithic Power Systems for future revenue diversification and growth, impacting their long-term earnings trajectory.

Monolithic Power Systems Earnings and Revenue Growth

Monolithic Power Systems Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

This narrative explores a more optimistic perspective on Monolithic Power Systems compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
The bullish analysts are assuming Monolithic Power Systems's revenue will grow by 18.8% annually over the next 3 years.
The bullish analysts assume that profit margins will shrink from 81.0% today to 25.7% in 3 years time.
The bullish analysts expect earnings to reach $949.5 million (and earnings per share of $19.7) by about April 2028, down from $1.8 billion today. The analysts are largely in agreement about this estimate.
In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 56.5x on those 2028 earnings, up from 15.7x today. This future PE is greater than the current PE for the US Semiconductor industry at 22.9x.
Analysts expect the number of shares outstanding to decline by 1.66% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 8.8%, as per the Simply Wall St company report.

Monolithic Power Systems Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

Delays and unpredictability in project ramps, especially within the enterprise data segment, could lead to fluctuating revenues and affect the stability of earnings throughout the year.
MPS is a relatively small player in a market with significant competition, which adds uncertainty to its ability to capture and maintain market share, potentially impacting future revenue growth.
The demand and uptake of new product developments such as silicon carbide inverters and automotive audio products are uncertain, and any slower-than-expected adoption could negatively affect future revenues.
The company faces timing and execution risks concerning the introduction and ramp-up of new technologies, such as 48-volt systems in the automotive sector, which might impact revenue recognition and growth timing.
Market and customer dynamics in the AI segment, characterized by rapid changes and volatile demand, could lead to fluctuations in revenue and potential pressure on profit margins due to the need for competitiveness in pricing.

Valuation

How have all the factors above been brought together to estimate a fair value?

The assumed bullish price target for Monolithic Power Systems is $925.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Monolithic Power Systems's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $925.0, and the most bearish reporting a price target of just $600.0.
In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $3.7 billion, earnings will come to $949.5 million, and it would be trading on a PE ratio of 56.5x, assuming you use a discount rate of 8.8%.
Given the current share price of $586.74, the bullish analyst price target of $925.0 is 36.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

Silicon Carbide Inverters And Audio Will Expand Markets Despite Uncertainty