Monolithic Earnings: 2023 Softness Weighs on Shares, but Long-Term Investors Should See Upside

We trim our fair value estimate for wide-moat Monolithic Power Systems MPWR to $535 per share, from $562, after first-quarter results met our expectations but second-quarter guidance came in lower than we forecast. End-market weakness is continuing for MPS, and we have lowered our 2023 forecasts to reflect a meaningful rebound being pushed out into 2024. Still, we don’t worry about MPS’ long-term opportunity or growth prospects. MPS’ chips are differentiated and the firm is steadily moving up the value chain across its served markets. With strong fundamental demand and unconstrained supply, we see near-term dynamics reflecting delayed, not destroyed, demand. The market reaction to results, a 10% selloff, was overly punitive in our view, and we continue to see shares as attractive.

First-quarter sales rose 19% year over year but dropped 2% sequentially for the second straight quarter to $451 million. MPS’ data center sales are suffering the most from spending slowdowns in 2023, with its largest customers delaying product ramps in a weaker macroeconomic environment. Still, we think Intel and AMD processor launches this year will supplement results in the second half of the year. The automotive market is the firm’s healthiest, and it is benefiting from both strong end demand and continued market share gains as it wins higher-value sockets. Spending remains soft among most of the firm’s served markets.

Non-GAAP gross margin declined 60 basis points year over year and 80 sequentially to 57.7%, reflecting pressure from lower volumes and some higher-priced inventory working through to revenue. MPS had been working to grow inventory the past two years, and now plans to wind some down in 2023 to get higher-cost items off the books. We see 2023 gross margin compression as transient, and maintain our long-term expectation for MPS to steadily raise its profitability with higher-value products and reach the low 60% gross margin range toward the end of the decade.