How New Products And Calculated Acquisitions Electrify The Automotive Sector

Key Takeaways

• Expansion into new applications with BridgeSwitch-2 and InnoMux-2 products and GaN technology adoption poised to significantly drive revenue growth.
  
• Focus on automotive sector and strategic acquisition of Odyssey Semiconductor assets indicate long-term growth prospects and an expanded market share.
  
• Currency fluctuations and reliance on China for sales, coupled with high inventory and soft demand, may squeeze margins and limit revenue growth.

Catalysts

Designs, develops, manufactures, and markets analog and mixed-signal integrated circuits (ICs), and other electronic components and circuitry used in high-voltage power conversion worldwide.

• Continued recovery in the consumer category with 70% revenue increase over the past 2 quarters, indicating a potential rebound in demand that could lead to revenue growth.
  
• Introduction of BridgeSwitch-2 and InnoMux-2 products expanding into new applications and increasing addressable market, expected to drive revenue growth through increased market share and higher average selling prices (ASPs).
  
• Projected inflection point in 2025 for Gallium Nitride (GaN) technology adoption across all end markets, enhancing product portfolio migration from silicon to GaN, which could significantly boost revenue with a 50% forecasted growth in GaN revenue next year.
  
• Growth in the automotive sector with production expansion into about 20 electric vehicle OEMs by year-end and the addition of high-voltage GaN ICs, marking a $1 billion future addressable market and potential revenue increase.
  
• Strategic acquisition of Odyssey Semiconductor assets to develop high-power GaN technology for EV drivetrain inverters, indicating long-term growth prospects in high-power applications and potential to increase market share in the automotive sector.

Assumptions

• Analysts are assuming Power Integrations's revenue will grow by 15.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.4% today to 15.1% in 3 years time.
• Analysts expect earnings to reach $96.3 million (and earnings per share of $1.5) by about September 2027, up from $42.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 57.5x on those 2027 earnings, down from 77.1x today. This future PE is greater than the current PE for the US Semiconductor industry at 25.8x.
• Analysts expect the number of shares outstanding to decline by 0.98% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.67%, as per the Simply Wall St company report.

Risks

• Limited visibility and challenging macroeconomic conditions could lead to unpredictable revenue growth, as mentioned in relation to near-term outlook uncertainty.
  
• Soft appliance demand and seasonally lower air conditioning sales in the future could negatively affect revenue from consumer categories.
  
• The reliance on China for a significant portion of sales, coupled with the current flat demand due to adverse market conditions there, could limit revenue growth potential.
  
• High inventory levels and the shift towards ordering products just in time by customers could affect the company's ability to accurately forecast demand and manage production, potentially impacting net margins.
  
• Currency fluctuations, particularly with the Japanese yen, could create unpredictability in manufacturing costs and operating expenses, potentially squeezing gross margins despite hedging strategies mentioned.

Valuation

• The analysts have a consensus price target of $78.5 for Power Integrations 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 $95.0, and the most bearish reporting a price target of just $68.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $638.0 million, earnings will come to $96.3 million, and it would be trading on a PE ratio of 57.5x, assuming you use a discount rate of 8.7%.
• Given the current share price of $58.18, the analyst's price target of $78.5 is 25.9% higher.
• 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.