To The Moon

Summary

• We remain buy-rated on Monolithic Power Systems, Inc. in 2H24 and 2025.

• Our positive thesis of AI-related tailwinds offsetting lackluster demand from other business lines remains in play into 2025.

• We're not too bothered by the higher multiple, as we believe MPWR is uniquely positioned to match growth expectations that the market is pricing in.

• We expect Nvidia to guide softly for its October quarter in comparison to consensus, and hence see a pullback of names with AI exposure like MPWR. We recommend investors load up on that pullback.

• We are Tech Stock Pros, veterans in the technology and investment spaces. We run the Investing Group Tech Contrarians where we provide institutional-level company research to individual investors.

Extreme close up of thrashing emerald ocean waves

We published a buy rating on $Monolithic Power(MPWR)$ back in November 2023 with the positive thesis that MPWR's AI-related revenue would be enough to offset muted demand from its other business lines: computing, automotive, consumer, and industrial. Our thesis played out to play out in 3Q23, 4Q23, and 1Q24, with management reporting higher enterprise data-related sales each quarter, up 106% Q/Q in 3Q23, 30% Q/Q in 4Q23, and 16% Q/Q and a whopping 217% Y/Y to $149.7M or ~33% of total sales in 1Q24. Simultaneously, management reported declines in its other business lines with the following results in 1Q24: computing -10%; automotive -3%; consumer -13%; and industrial -9%, respectively, due to weaker end demand.

Looking towards next quarter, despite management's forecast for all other end markets (except for automotive) to be flat Q/Q, the company still comfortably beat revenue consensus for Q2. Management is guiding for sales to grow 5-9% Q/Q to $480M to $500M, above estimates of $474M.

The hypergrowth in MPWR's enterprise data center sales is a direct result of strength from AI-led demand. We reaffirm our buy on MPWR stock based on our belief that AI-led tailwinds will continue to support outperformance and share gain in 2025.

The stock is up 77% since our buy in early November, versus the S&P 500 (SP500), up 29% during the same period, as shown in the graph below.

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We expect MPWR to continue outperforming its peer group into 2025. The chart below shows the stock's performance against the S&P 500, ON Semiconductor (ON), Microchip Technology (MCHP), and STMicroelectronics (STM) over the past six months. MPWR's selling point for investors remains its AI growth exposure and, by extension, its status as another way to play on AI demand.

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Does our thesis hold true for next-gen AI data centers?

Management got asked pretty directly about just this on their 1Q24 earnings call; the question was about rumors that next-gen AI data centers (that use liquid cooling and other methods for lower power consumption) would have lower power management content and potentially negatively impact MPWR's product use cases in the AI server power management market. To this, the President of MPWR, Michael Hsing, and Tony Balow answered the following:

"All these cooling systems, the new format of vertical powers, and MPS involve all of them. And if they transition to those markets, and these systems and MPS is in the same games, like, we will gain, and we will grow with that…. we've demonstrated, particularly with enterprise data is the ability to leverage up content as we go into higher value technology. For example, the water-cooled in verticals represent opportunities, not threats. And if you look down the line not far out, we'll also be going into rack power as well."

This is where MPWR diverges from its peer group; MPWR is unique because it

1. Tends to gain share during the market downturn, and

2. Is highly adaptable to new market needs, providing it a first-mover advantage in the AI server market.

We see more room for upside driven by AI server demand into next year, particularly with Nvidia's (NVDA) new product cycle with the Blackwell series. The following chart from MPWR's 1Q24 earning results showcases MPWR's growth potential through powering AI.

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Valuation & Word on Wall Street

MPWR is not cheap; in fact, it's expensive relative to the peer group average. The stock is trading at 18.9x EV/C2024 Sales versus the peer group average at 7.9x. On a P/E ratio, the stock is trading at 62.6x C2024, compared to a group average of 33.3x. We're not too concerned with the higher multiple because we're seeing multiple expansions across the semi-peer group in response to the AI-led bull expectations; comparing MPWR's valuation back in November 2023 to this July, the upward trend is visible.

Last time we wrote on MPWR, the stock was trading at EV/Sales of 10.0x compared to a group average of 5.0x and P/E ratio of 34.4x compared to a group average of 32.9x. We advise investors against being too wary of MPWR's higher multiple, as we see it as the result of its AI growth exposure. And, unlike companies like Advanced Micro Devices (AMD), which claim AI (hyper) growth exposure but missed consensus outlook for five quarters straight and trades at an above peer group ratio, MPWR is uniquely positioned to actually match the future earnings the market is pricing in. The results over the past three quarters confirm that. We think MPWR is a growth stock and see a favorable risk-reward at current levels.

The following chart outlines the valuation against the peer group.

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Wall Street shares our bullish sentiment on the stock despite the premium multiples. Of the 14 analysts covering it, 11 are buy-rated, and the remaining are hold-rated. The following charts outline sell-side ratings for MPWR.

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MPWR's financial health also helps to further justify the higher multiple; its debt-free balance sheet provides it an edge in financial stability and flexibility. Similar to Lam Research (LRCX), a high 96% of the company's shares are institutionally owned, confirming confidence in MPWR's ability to match future growth expectations.

What to do with the stock?

We remain positive on Monolithic Power Systems, Inc. for FY24; the company's total serviceable addressable market or SAM for 2023 is $21B, showing an upward trend from $16B in 2018 and $10B in 2015, almost ten years ago, according to their recent earnings presentation. Our optimism remains centered around its AI server-led demand growth supporting outperformance, and we expect to see green shoots from other business lines in 2025, particularly automotive. Management expects automotive sales to have a Q/Q rebound next quarter.

We do believe investors should keep an eye on Nvidia's results and, more importantly, the outlook for the October quarter. We expect NVDA to guide softly in comparison to consensus and hence see an air pocket forming that would pull back names with AI exposure like MPWR. Then, we recommend investors load up on that pullback.