Risks To Shareholder Returns Are Elevated At These Prices For Monolithic Power Systems, Inc. (NASDAQ:MPWR)

You may think that with a price-to-sales (or "P/S") ratio of 24.3x Monolithic Power Systems, Inc. (NASDAQ:MPWR) is a stock to avoid completely, seeing as almost half of all the Semiconductor companies in the United States have P/S ratios under 4x and even P/S lower than 1.7x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Monolithic Power Systems

How Has Monolithic Power Systems Performed Recently?

Monolithic Power Systems could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Monolithic Power Systems' future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as steep as Monolithic Power Systems' is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a decent 2.5% gain to the company's revenues. The latest three year period has also seen an excellent 82% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 22% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 25% per annum, which is not materially different.

With this in consideration, we find it intriguing that Monolithic Power Systems' P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What Does Monolithic Power Systems' P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Analysts are forecasting Monolithic Power Systems' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. A positive change is needed in order to justify the current price-to-sales ratio.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Monolithic Power Systems that you should be aware of.

If these risks are making you reconsider your opinion on Monolithic Power Systems, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.