Full-Service Silicon Solutions Will Power AI And Auto Amid Uncertainties

Key Takeaways

• MPS's transition to providing full-service silicon-based solutions and global diversification aims to drive growth, improve margins, and enhance operational efficiencies.
  
• Strong expansion in automotive and AI data centers, with significant design wins, is expected to boost revenue and market share.
  
• Uncertainty in revenue ramps, tariff-related risks, high inventory, and competitive pressures in emerging markets may affect MPS's revenue growth and market share.

Catalysts

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

• MPS is experiencing strong design wins and revenue ramps expected in the second half of the year, particularly in the storage and computing segments, which could drive future revenue growth.
  
• The automotive segment has shown consistent sequential double-digit growth, and MPS expects continued growth due to increasing demand for higher voltage transitions (48-volt and 800-volt systems) and power isolation modules, likely enhancing future revenue and market share.
  
• MPS is transforming from a chip-only semiconductor supplier to a full-service silicon-based solutions provider, which could drive revenue growth and improve net margins through additional value-added services.
  
• The company's global diversification strategy in manufacturing and R&D across the U.S., China, and Europe is expected to mitigate tariff risks and stabilize supply, potentially enhancing operational efficiencies and net margins.
  
• MPS anticipates significant growth opportunities in AI-related data centers and server markets, with increasing market share and ramping design wins in enterprise data, potentially boosting future revenues and earnings.

Monolithic Power Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Monolithic Power Systems's revenue will grow by 15.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 76.6% today to 25.8% in 3 years time.
• Analysts expect earnings to reach $947.3 million (and earnings per share of $19.53) by about May 2028, down from $1.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.5x on those 2028 earnings, up from 16.3x today. This future PE is greater than the current PE for the US Semiconductor industry at 22.5x.
• Analysts expect the number of shares outstanding to decline by 1.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.07%, as per the Simply Wall St company report.

Monolithic Power Systems Future Earnings Per Share Growth

Risks

• There is uncertainty about the exact timing of revenue ramps from design wins in the enterprise data sector, potentially impacting MPS's ability to achieve forecasted revenue growth in the short term.
  
• The company's exposure to tariff-related risks and ongoing US-China trade tensions could affect manufacturing costs and pricing strategies, impacting net margins.
  
• High inventory levels are a concern; despite MPS's strategy to hold significant inventory, there is a risk that it might indicate slowing demand or inefficiencies, which could affect net earnings.
  
• Competitive pressures, particularly in emerging markets such as AI and automotive, where multiple large companies are investing heavily, could impact MPS's market share and revenue.
  
• Macro-economic factors and unpredictable customer demand in sectors like automotive and industrial make it challenging to strip out the impact of MPS's new design wins from broader market trends, potentially impacting revenue predictability.

Valuation

• The analysts have a consensus price target of $754.596 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 $899.0, and the most bearish reporting a price target of just $644.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.7 billion, earnings will come to $947.3 million, and it would be trading on a PE ratio of 46.5x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $622.99, the analyst price target of $754.6 is 17.4% 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.