MPS Earnings: Great Data Center Sales Offset Other Markets’ Softness, Leaving Our Fair Value Intact

We maintain our fair value estimate for wide-moat Monolithic Power Systems MPWR at $535 per share after its third-quarter results and fourth-quarter guidance met our expectations. MPS’ sales into data centers did tremendously well in the quarter, but the rest of its end markets continued to see softer customer spending. MPS is on track for a tame year of results by its own high standards, but we continue to expect growth to inflect back up behind its ability to gain share and benefit from trends like artificial intelligence, or AI, and electric vehicles. Despite weak end markets, we see MPS’ share gains across its served markets as sticky and reflective of its wide economic moat. Shares rose 5% on the good results, but we continue to see them as nicely undervalued.

Third-quarter sales dropped 4% year over year but rose 8% sequentially to reach $475 million. MPS’ sales into data centers were the standout result of the quarter, more than doubling sequentially and rising 31% year over year to $99 million. We see data center sales as one of MPS’ most promising growth vectors, with stellar placements alongside GPUs from the likes of Nvidia and CPUs from the likes of Intel and AMD for power management. After a few periods of weakness from soft cloud spending, we credit the strong quarter to investments in AI. MPS’ other served markets were all soft sequentially, as customer spending on chips has slowed.

Gross margin declined sequentially for the fourth straight quarter to a non-GAAP level of 55.7%. Management had guided to weak margin performance in 2023 resulting from sell-through of older, higher-priced inventory, and we’re eager for margin to return to healthier levels in the high-50% range in 2024.

Guidance for the fourth quarter implies a 5% sequential sales decline at the midpoint and flat non-GAAP gross margin. We expect data center sales to remain high, but for other markets to remain weak.