Share prices of power chip designer Monolithic Power Systems (MPWR 0.29%) are up by well over 30% so far in 2024. Given that semiconductor stocks are all the rage these days, that doesn't sound all that impressive.
But consider: Monolithic is clobbering the returns of its closest competitors -- Texas Instruments (TXN -0.07%), Analog Devices (ADI 0.38%), and ON Semiconductor (ON 0.96%), to name a few -- by a very wide margin. The outperformance is even more stark when zooming out and viewing Monolithic's rise over the last decade.
Data by YCharts.
This year's run has a lot to do with Monolithic's data center power business. Is it too late to join the party?
A unique power chip business model
Monolithic's rise isn't simply a story of a small company getting bigger. It also has a unique business model among its large peers.
When it comes to power chips (which form the circuitry that ensures the right amount of power is delivered to an electronic system, everything from a data center to a home appliance), most companies in this field both design and manufacture devices. As chip manufacturing has become more complex over the years, companies have had to strike a careful balance between advancing chip designs, but not so much that it triggers the need for expensive overhauls to manufacturing lines.
This isn't the case for Monolithic. It's fabless, meaning it outsources manufacturing to various partners, most of them in East Asia (notably, this does create some geopolitical risk). However, this leaves Monolithic with the ability to focus solely on power chip design, making it nimble and able to pivot to fast-changing customer needs.
Speaking of pivoting, it's the company's data center end market that has investors particularly excited right now. While many of its peers have been reporting falling revenue tied to soft demand in automaking (including a slowdown in electric vehicles) and industrial power equipment, Monolithic reported a tripling in sales from its enterprise data segment in the first quarter to $150 million. This growth completely offsets the downturn in every other power chip segment.
And there's more good news. While it's too soon to say for certain, there's optimism that Monolithic's struggling power chip segments will return to growth in the second half of 2024 and join in on the data center party, which could send overall revenue and profitability skyward.
How expensive is the stock really?
Without a doubt, because of the stock's run higher in the last year paired with earnings per share (EPS) falling during the semiconductor market downturn, Monolithic is an expensive stock. Shares trade for nearly 100 times trailing-12-month EPS or 67 times trailing-12-month free cash flow.
However, based on early estimates for the full year 2024, the stock trades for 62 times EPS. That implies a big rebound is coming in profitability.
Again, this rally in the bottom line will be contingent on the data center power chip segment continuing to run higher thanks to new needs created by AI systems. And to unlock its full profit potential, other industrial end markets will need to bottom out and begin a recovery as well.
Nevertheless, as I've covered in the past, Monolithic has a long track record of outperforming the semiconductor industry and its power chip peers in good times and bad. This business is a long-term winner, and rising energy needs from technology infrastructure have created yet another new tailwind for it.
I've passed on buying this stock numerous times over the years due to its valuation, but that has been a mistake. I plan on adding a small position in Monolithic Power Systems to my portfolio and reassessing later in 2024.
