Over the past six months, Power Integrations’s shares (currently trading at $55.25) have posted a disappointing 13.1% loss while the S&P 500 was flat. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy Power Integrations, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Even with the cheaper entry price, we don't have much confidence in Power Integrations. Here are three reasons why POWI doesn't excite us and a stock we'd rather own.

Why Do We Think Power Integrations Will Underperform?

A leading supplier of parts for electronics such as home appliances, Power Integrations (NASDAQ: POWI) is a semiconductor designer and developer specializing in products used for high-voltage power conversion.

1. Long-Term Revenue Growth Flatter Than a Pancake

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Power Integrations struggled to consistently increase demand as its $419 million of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of poor business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

2. Shrinking Operating Margin

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Analyzing the trend in its profitability, Power Integrations’s operating margin decreased by 10.2 percentage points over the last five years. Power Integrations’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 4.3%.

3. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Power Integrations, its EPS declined by 20.6% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.

Final Judgment

Power Integrations doesn’t pass our quality test. After the recent drawdown, the stock trades at 36.6× forward price-to-earnings (or $55.25 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find better investment opportunities elsewhere. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

Stocks We Would Buy Instead of Power Integrations

The Trump trade may have passed, but rates are still dropping and inflation is still cooling. Opportunities are ripe for those ready to act - and we’re here to help you pick them.

Get started by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.