The stock of Power Integrations (NAS:POWI, 30-year Financials) gives every indication 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 $82.48 per share and the market cap of $5 billion, Power Integrations stock is believed to be significantly overvalued. GF Value for Power Integrations is shown in the chart below.
Because Power Integrations is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 4.3% over the past five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Power Integrations has a cash-to-debt ratio of 10000.00, which is better than 100% of the companies in Semiconductors industry. The overall financial strength of Power Integrations is 10 out of 10, which indicates that the financial strength of Power Integrations is strong. This is the debt and cash of Power Integrations over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Power Integrations has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $552.4 million and earnings of $1.56 a share. Its operating margin of 17.30% better than 79% of the companies in Semiconductors industry. Overall, GuruFocus ranks Power Integrations's profitability as fair. This is the revenue and net income of Power Integrations 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Power Integrations is 4.3%, which ranks in the middle range of the companies in Semiconductors industry. The 3-year average EBITDA growth rate is 6.4%, which ranks in the middle range of the companies in Semiconductors industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Power Integrations's ROIC was 24.88, while its WACC came in at 7.40. The historical ROIC vs WACC comparison of Power Integrations is shown below:
Overall, the stock of Power Integrations (NAS:POWI, 30-year Financials) appears to be significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks in the middle range of the companies in Semiconductors industry. To learn more about Power Integrations stock, you can check out its 30-year Financials here.
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