The stock of Monolithic Power Systems (NAS:MPWR, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $367.52 per share and the market cap of $16.8 billion, Monolithic Power Systems stock shows every sign of being significantly overvalued. GF Value for Monolithic Power Systems is shown in the chart below.
Because Monolithic Power Systems is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 18.5% over the past three years and is estimated to grow 18.26% annually over the next three to five years.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Monolithic Power Systems has a cash-to-debt ratio of 192.03, which which ranks better than 90% of the companies in Semiconductors industry. The overall financial strength of Monolithic Power Systems is 7 out of 10, which indicates that the financial strength of Monolithic Power Systems is fair. This is the debt and cash of Monolithic Power Systems over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Monolithic Power Systems has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $844.5 million and earnings of $3.49 a share. Its operating margin is 19.74%, which ranks better than 83% of the companies in Semiconductors industry. Overall, the profitability of Monolithic Power Systems is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Monolithic Power Systems over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Monolithic Power Systems is 18.5%, which ranks better than 84% of the companies in Semiconductors industry. The 3-year average EBITDA growth rate is 22%, which ranks better than 69% of the companies in Semiconductors industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Monolithic Power Systems's return on invested capital is 33.90, and its cost of capital is 7.42. The historical ROIC vs WACC comparison of Monolithic Power Systems is shown below:
To conclude, Monolithic Power Systems (NAS:MPWR, 30-year Financials) stock gives every indication of being significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 69% of the companies in Semiconductors industry. To learn more about Monolithic Power Systems stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.