We maintain our buy rating on Monolithic Power Systems (NASDAQ:MPWR). We think data center revenue more or less saved the day this quarter, offsetting weaker auto and industrial end demand. We now expect MPWR to outperform in the near term, driven by continued growth in AI-related revenues.
This quarter, the company reported revenue of $474.87M, down -4.1% Y/Y, beating consensus by $1.15M and growing 8% QoQ versus last quarter, in which revenue dropped 4.3% to $441.1M in line with estimates. We still think MPWR is not immune to industry cyclicality and weaker end demand in automotive, consumer, communications, and industrial-related markets, but we believe growth in enterprise data-related sales and auto design wins can offset macro weakness and drive upside for the stock into 2024.
This quarter, enterprise data-related sales surged 106% QoQ to $129.5M; we think this is a material rebound, considering last quarter’s sales grew only 2% QoQ to $48M. To contextualize, this quarter, enterprise data-related sales accounted for roughly 27% of total sales compared to around 11% last quarter. We see more upside for A.I.-related revenue driven by better GPU and CPU-related demand into 2024. We think we’ve exited the muted data center spend environment that previously weighed on top-line growth. Now, we expect financial outperformance for MPWR as the computing market enters recovery mode and A.I.-related revenues continue to experience demand tailwinds.
The volatility in end demand from consumer, communications, and industrial end markets is expected to continue into the next quarter after declining 4%, 5%, and 15% this quarter to $62.4M, $46.8M, and $42.1M, respectively. We’re also seeing weakness from the auto-correction weigh on sales this quarter for MPWR, and the broader peer group, specifically ON Semiconductor (ON), suffering a 24% sell-off post-earnings this week. Management noted a “lack of short-term visibility continues to make forecasting beyond the next quarter difficult.” Still, we think MPWR’s design win pipeline remains intact to drive outperformance in 2024. We think MPWR has an advantage in the auto market in regards to its new design win ramp in 2024 and expect this will help offset the demand weakness in the market.
The following graph outlines MPWR’s end market exposure and results this quarter.
Additionally, we think the bulk of weakness has been priced into the stock; MPWR is down ~4% over the past six months, underperforming the S&P 500 by around 4%. We think the demand weakness has been factored into not only the stock price but also the outlook for the next quarter. Management is guiding sales to decline 3-7% QoQ in 4Q23 to the range of $442-$462M, in line with the consensus of $452M.
The following graph outlines MPWR stock performance against the S&P 500 over the past six months.
The stock is trading above the peer group average. On a P/E basis, the stock is trading at 34.4x C2023 EPS $11.73 compared to the peer group average of 32.9x. The stock is trading at 10.0x EV/C2023 Sales versus the peer group average at 5.0x. We understand investor concern over the higher valuation, but we think the higher multiple is justified as we considered MPWR a growth stock and see an accelerated growth rate into 2024.
The following chart outlines MPWR’s valuation against the peer group.
Word on Wall Street
Wall Street is bullish on MPWR. Of the 14 analysts covering the stock, 11 are buy-rated, and the remaining are hold-rated. The stock is currently priced at $404 per share. The median sell-side price target is $550, while the mean is $543, with a potential 34-36% upside.
The following charts outline sell-side ratings and price targets for MPWR.
What to do with the stock
We maintain our buy rating on MPWR. We think MPWR will experience a sequential decline in all its end markets but see A.I. and auto-related sales rebounding QoQ into 2024. We expect this to drive financial outperformance. Management noted on the call, “While we expect visibility to remain limited in the short term, which was the same as last quarter, we continue to execute on our long-term strategy.” We see an attractive risk-reward profile for the stock into 2024 and recommend investors explore entry points at current levels as the stock hovers closer to its 52-week lows.