Overvaluation And Rising Costs Will Erode Semiconductor Margins

Key Takeaways

• AI and automotive growth opportunities drive optimism, but market saturation and high expectations could limit future revenue acceleration.
  
• Investments in innovation and manufacturing are positive, yet rising costs and supply chain risks may pressure profitability and stability.
  
• Expansion into AI data centers, automotive electrification, and full-service solutions drives diversified growth, margin improvement, and resilience against single-market risks.

Catalysts

Designs, develops, markets, and sells semiconductor-based power electronics solutions for the storage and computing, automotive, enterprise data, consumer, communications, and industrial markets in the United States, China, Taiwan, South Korea, Europe, Southeast Asia, Japan, and internationally.

• Investor optimism appears anchored in MPS's exposure to accelerating AI adoption in data centers (including design wins with major ASIC-based AI platforms and anticipated industry-wide server transitions to 48V/800V architectures), which could drive sustained revenue outperformance, even as end-market growth normalizes and competition increases.
  
• Expectations for long-term automotive segment growth, driven by secular shifts toward EVs, zonal and 48V/800V in-car architectures, and increased semiconductor content per vehicle, are supporting high valuation multiples; however, these trends may already be fully priced in, leading to risk of eventual slower revenue growth as the rollout curve flattens.
  
• The company's significant investments in manufacturing, technology innovation, and expansion into new markets are assumed by the market to translate into continuous margin expansion and earnings leverage, but increasing R&D and compliance costs, as well as rising environmental/supply chain requirements, could erode net margins over time.
  
• Assumptions of a structurally larger total addressable market are driven by the rapid proliferation of connected/IoT devices and edge computing; if industry saturation or macro slowdowns materialize, expectations of consistently robust top-line growth and favorable earnings revisions may prove optimistic.
  
• MPS's narrative of diversified customer exposure and supply chain resilience (including geographic diversification of capacity) underpins investor confidence in stable long-term growth, but short ordering cycles, periodic inventory corrections, and potential customer concentration risk may introduce volatility to both revenues and near-term earnings not reflected in current valuations.

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 73.2% today to 26.2% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $21.22) by about August 2028, down from $1.9 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 49.3x on those 2028 earnings, up from 21.7x today. This future PE is greater than the current PE for the US Semiconductor industry at 28.5x.
• Analysts expect the number of shares outstanding to decline by 1.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.1%, as per the Simply Wall St company report.

Monolithic Power Systems Future Earnings Per Share Growth

Risks

• The company has demonstrated broad-based, diversified revenue growth across all of its end markets-including enterprise data, auto, storage, compute, and communications-which suggests resilience against declines in any single segment and improves the visibility and stability of long-term revenues.
  
• Monolithic Power Systems is attaining major design wins with multiple large, blue-chip customers in the rapidly growing AI and ASIC data center market, and is benefiting from secular multi-year expansion in AI, machine learning, and power-hungry architectures-a structural tailwind for power management IC suppliers that could support robust, sustained top-line growth.
  
• There is sustained strong momentum in the automotive segment, with content per vehicle rising due to adoption of 48-volt and zonal architectures, and MPS set to benefit further as electrification and digitalization accelerate across the auto industry, which can provide a reliable and high-growth revenue stream for the company over several years.
  
• The company's transformation from a chip-only semiconductor supplier to a full-service silicon-based solutions provider, and its focus on vertical, module-based, and system-level solutions, allow it to capture higher value, increase customer stickiness, and drive gross and operating margin expansion critical for long-term earnings growth.
  
• MPS has expanded its manufacturing and supply chain capacity to $4 billion in annual revenue, with significant diversification outside China, positioning it to gain share, secure supply for customers in a geopolitically sensitive environment, and take advantage of rising semiconductor content in end devices-all of which may support higher revenues and margins in future years.

Valuation

• The analysts have a consensus price target of $843.231 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 $940.0, and the most bearish reporting a price target of just $750.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.9 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 49.3x, assuming you use a discount rate of 10.1%.
• Given the current share price of $844.8, the analyst price target of $843.23 is 0.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.