Silicon Carbide Inverters And Diversification May Drive Future Success, But Reliance On New Products Carries Risks

Key Takeaways

• Product innovation and diversification in silicon carbide and automotive applications could enhance revenue growth and net margins in new markets.
  
• Capital return strategies, including share repurchases and increased dividends, signal shareholder value focus and potential EPS improvement.
  
• MPS's growth relies on new innovations and customer relationships, but supply chain uncertainties and competition pose risks to revenue and margins.

Catalysts

Designs, develops, markets, and sells semiconductor-based power electronics solutions for the storage and computing, automotive, enterprise data, consumer, communications, and industrial markets.

• The introduction of silicon carbide inverters for high-powered clean energy applications, with additional revenue expected to ramp in late 2025, and further silicon carbide-based applications launching in multiple geographies during 2025 and 2026, is anticipated to boost revenue growth.
  
• Development of high-quality, cost-effective automotive audio products and innovative battery management solutions for enterprise notebooks indicates potential new revenue streams and improved net margins through product diversification and technological innovation.
  
• The ramping of new high-accuracy 24-bit analog to digital converters in the second half of 2025 could drive revenue growth, leveraging MPS's focus on innovation and high-quality solutions to capture new market opportunities.
  
• Expansion into new markets and diversification of end market applications and global supply chain are positioning MPS to capture future growth opportunities and improve revenue stability by mitigating risks associated with market volatility.
  
• Significant share repurchases and a quarterly dividend increase by 25% illustrate MPS's commitment to returning capital to shareholders, which can improve earnings per share (EPS) and overall shareholder value.

Monolithic Power Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Monolithic Power Systems's revenue will grow by 17.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 81.0% today to 26.2% in 3 years time.
• Analysts expect earnings to reach $935.9 million (and earnings per share of $19.42) by about March 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 analysts price target, the company would need to trade at a PE ratio of 50.6x on those 2028 earnings, up from 16.7x today. This future PE is greater than the current PE for the US Semiconductor industry at 29.4x.
• 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 8.48%, as per the Simply Wall St company report.

Monolithic Power Systems Future Earnings Per Share Growth

Risks

• MPS's growth is heavily reliant on new product ramps and innovations, such as the silicon carbide inverter and automotive audio products. Delays or failures in these areas could lead to missed revenue projections and impact earnings.
  
• The enterprise data segment, despite its potential, is expected to be volatile and flattish for 2025, with uncertain timing on ramp-ups, which could lead to uneven or stagnant revenue flows in this valuable market.
  
• There's a heavy dependence on large, hyperscale customers and any disruption in these relationships or failures to secure substantial market share could significantly hinder revenue growth and margins.
  
• Supply chain uncertainties and customer demand volatility, particularly in AI and automotive sectors, may lead to misalignments in inventory and production costs, negatively affecting net margins.
  
• While there is enthusiasm around emerging markets such as optical communications and silicon carbide, the overlap with competitors and potential technological execution risks could result in reduced market penetration and subsequently lower-than-expected revenues.

Valuation

• The analysts have a consensus price target of $823.81 for Monolithic Power Systems based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1100.0, and the most bearish reporting a price target of just $710.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $935.9 million, and it would be trading on a PE ratio of 50.6x, assuming you use a discount rate of 8.5%.
• Given the current share price of $622.29, the analyst price target of $823.81 is 24.5% 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.