This chip set maker is ready to power the technologies of the future
As the COVID-19 pandemic shut down swaths of the global economy and forced millions into self-isolation, people were forced to quickly adapt to a new, changing world.
This meant an increase in Zoom calls, online streaming, and a wide array of other technologies that experts believed were years away from being widely adopted.
Despite this massive uptake in technology use, one company that stands to benefit immensely from tailwinds such as 5G and the Internet of Things has been pushed under the radar by as-reported metrics.
Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.
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We have regularly talked about the 5G revolution and how it is fast approaching.
One of the biggest reasons people are so excited about 5G is because it will be a major step in unleashing the Internet of Things (IoT). The IoT has remained locked away at home and other indoor areas as it can only currently function on Wi-FI and direct connection to broadband.
A broadening of the 5G landscape outside the home will aid the development and widespread adoption of sustainable infrastructure and technologies of the future such as autonomous vehicles, smart cities, and much more.
Unsurprisingly, the biggest winners of this coming revolution are going to be the companies that enable IoT solutions to work, especially those that manufacture the power systems on which they will run.
This is exactly how today’s company, Monolithic Power Systems (MPWR), makes its money doing.
Specifically, the company manufactures chip sets that help manage power for all of these innovations.
Power comes out of a wall socket at 120 volts of alternating current (AC), which is a high energy transfer method where the polarity rapidly switches, or alternates, for more efficient transportation.
However, most computers and other complex devices can’t handle this level of load, and use low voltage direct current (DC) at various voltages to protect sensitive components.
Monolithic Power Systems creates the products and software to manage all of these different levels of power. As more and more products become attached to the internet of things such as fridges and cars, with eventually even street lights and crosswalk signs connected, they will all have their own power requirements Monolithic Power Systems can service.
Even as IoT technology has rapidly accelerated during the pandemic, as-reported metrics would suggest the company has not seen much benefit.
Rather than increasing as one would expect, as-reported ROA have actually stayed flat around 10% levels over the past four years.
However, this image of corporate stagnation is only an artifact of GAAP distortions. The story of Monolithic Power Systems is revealed only when we adjust for items such as excess cash and stock option expense.
When looking at Uniform Accounting metrics, the value this company generates is clearly evident, with Uniform ROA almost doubling over the same time frame, from 12% to 21%.
It appears supplying an essential service to the booming technologies of the future is a great business to be in.
Investors relying on GAAP would be led to believe otherwise. This is why any investor looking to understand market movements needs to be using data which reflects reality, not the fantasy world GAAP would have you believe.
SUMMARY and Monolithic Power Systems, Inc.
As the Uniform Accounting tearsheet for Monolithic Power Systems, Inc. (MPWR:USA) highlights, the Uniform P/E trades at 81.0x, which is above the global corporate average of 23.7x and its historical average of 58.6x.
HIgh P/Es require high EPS growth to sustain them. In the case of Monolithic Power, the company has recently shown a 60% Uniform EPS growth.
Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Monolithic Power’s Wall Street analyst-driven forecast is an EPS growth of 33% and 25% in 2021 and 2022, respectively.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Monolithic Power’s $462 stock price. These are often referred to as market embedded expectations.
The company is currently being valued as if Uniform earnings were to grow 39% annually over the next three years. What Wall Street analysts expect for Monolithic Power’s earnings growth is below what the current stock market valuation requires through 2022.
Furthermore, the company’s earning power is 3x the corporate average. Also, cash flows and cash on hand are almost 5x above its total obligations—including debt maturities, capex maintenance, and dividends. This signals a low credit and dividend risk.
To conclude, Monolithic Power’s Uniform earnings growth is below its peer averages, but currently trades above its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research