Looking for a stock that keeps turning out higher revenue through all economic conditions and cycles?
That’s what Monolithic Power Systems Inc. (MPWR, Financial) has delivered in recent years.
About Monolithic
Founded in 1997 and based in Kirkland, Washington, the company describes itself in its 10-K as “a global company that provides high-performance, semiconductor-based power electronics solutions.”
It lists its three core strengths as:
- Deep system-level knowledge
- Strong semiconductor design expertise
- Innovative proprietary semiconductor process and system integration technologies
The annual filing adds that these combined strengths allow the company to “deliver highly integrated monolithic products that offer energy-efficient, cost-effective, easy-to-use solutions for systems found in computing and storage, automotive, industrial, communications and consumer applications.”
These are the revenue contributions of its end markets:
Source: June 2022 investor presentation
The company designs, manufactures and sells over 4,000 products, which are sold through “third-party distributors, value-added resellers and directly to original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”), electronic manufacturing service (“EMS”) providers and other end customers.”
Competition
Monolithic considers the industry to be highly competitive and names the following as its most important competitors: Analog Devices (ADI, Financial), Infineon Technologies (XTER:IFX, Financial), NXP Semiconductors (NXPI, Financial), ON Semiconductor (ON, Financial), Power Integrations (POWI, Financial), Renesas Electronics (RNECF, Financial), ROHM Semiconductor (ROHCY, Financial), Semtech (SMTC, Financial) and Texas Instruments (TXN, Financial).
The GuruFocus comparison chart shows Monolithic outperforming one of those rivals, as well as another semiconductor company, Skyworks Solutions (SWKS, Financial):
In the 10-K, Monolith argues it is competitive in the markets it serves because its integrated circuits are generally smaller in size, highly integrated, have higher levels of power management functionalities and reach high-performance specs at lower prices than most of its competitors.
Financial strength
There is a lot of green on that table, and particularly notable is the interest coverage since Monolith has no debt.
At the bottom of the table, we see a disproportionate relationship between the weighted average cost of capital (all equity) and its return on invested capital (all going to shareholders). Specifically, its WACC is 6.13% and its ROIC is 42.48%. It is a company that obviously creates much value for its shareholders.
Profitability
An all-green table is a rarity, and one reason Monolithic gets such a high GF Score.
Even on the lighter green bars, the company does well. For example, its operating margin is higher than 79.73% of other companies in the semiconductors industry. Similarly, its net margin outperforms 77.85% of its peers and competitors.
Growth
Over the past three years, it has produced strong growth in revenue, Ebitda and earnings per share without non-recurring items. This is how these metrics look over a 10-year period:
From the chart, we can deduce the company has grown throughout the past decade, and with more momentum in the past two years.
Free cash flow growth has also been solid, although the yellow bar indicates the rate is near the industry average. In its investor presentation, the company reported that 47% of its free cash has been returned to shareholders.
Monolithic appears to take special pride in its ability to grow its revenue, no matter the current economic conditions. This is the first content slide in its June 2022 investor presentation:
Dividends and buybacks
Although it pays out a significant amount of its cash flow to shareholders, the dividend yield is relatively low. That’s in part because the share price has risen sharply in recent years:
Nevertheless, Monolithic has increased the dividend growth rate ambitiously since it began paying them in 2014. That growth helps explain why the yield did not fall farther when the share price spiked.
At the same time, it has kept issuing new shares, so the dividend per share growth has been working against an average of 3% growth per year in the number of shares over the past 10 years. That is a significant amount of dilution.
Valuation
We start with the obvious question: How does Monolithic get such a high ranking for GF Value when all the metrics below it are red?
It is because the GF Value rank is determined by a proprietary GuruFocus formula. Specifically, it is based on the price-to-GF Value ratio. To calculate that ratio, you divide the stock price ($454.19) by the GF Value ($547.19) and that equals 0.83, suggesting it is modestly undervalued even though the other major valuation metrics appear to be high compared to other industry competitors. According to GuruFocus' categorization, companies with GF Value ratings that fall within this range rank better than companies that are severly undervalued or overvalued.
The discounted cash flow calculator produces an overvalued rating, with negative margins of safety. The default growth rate in the growth stage is 20%, which is nearly a third below the 10-year earnings per share without NRI average. At the 20% growth rate, the DCF number is a -107.46% margin of safety; at 29%, we get a -12.11% margin of safety.
Obviously, investors will need to do some homework on these valuations.
Fundamentals overview
At the close of trading on July 21, Monolithic had a perfect GF Score of 100 out of 100. It is alone with that score, making it America’s best-rated, by fundamentals, public company:
Gurus
Despite the score, Monolithic was owned by only six gurus at the end of the first quarter. These three had the biggest stakes:
- Jim Simons (Trades, Portfolio)' Renaissance Technologies held 153,526 shares after reducing its holding by 15.27%. That represented 0.33% of Monolithic’s shares outstanding and 0.09% of Renaissance’s assets under management.
- Jerome Dodson (Trades, Portfolio)'s Parnassus Fund owned 50,262 shares, an increase of 2.79% over the previous quarterly close.
- Ray Dalio (Trades, Portfolio)'s Bridgewater Associates had 10,119 shares, a new holding.
Conclusion
Monolithic Power Systems has numerous attractions for investors.
First, it has a history of dependably generating revenue, which turns into earnings per share and should lead to share price appreciation and continued dividend growth. Second, it has an exceptionally good fundamentals score that should stay high because of its competitive advantages. Third, and regardless of whether it is undervalued or not, it currently trades below its long-term average price.
Value investors who consider Monolithic undervalued will also note it has no debt and perhaps put it on their shortlists. Growth investors who hope history will repeat itself may wish to monitor it. But income investors should look elsewhere for a stock with a dividend that is significantly higher.
