Monolithic Power Systems, Inc. (MPWR) develops, produces, and sells semiconductor-based power electronics solutions for the computing, storage, automotive, industrial, communications, and consumer industries. The stock has gained 12.2% over the past year.

The company’s revenue and EBITDA have grown at a CAGR of 30.8% and 39.4%, respectively, over the past three years. Furthermore, its net income and EPS have increased at CAGRs of 36.1% and 32.9%, respectively, over the past three years.

However, its shares are down 21% year-to-date and 9.7% over the past month to close yesterday’s trading session at $389.64. Increased demand for semiconductor chips from industries such as automotive and electronics has resulted in a significant supply-demand imbalance. Intel CEO Pat Gelsinger projects that the semiconductor industry may face supply bottlenecks until 2024. This might stifle MPWR's growth and negatively impact its prospects. In addition, the company’s lofty valuation also makes its near-term prospects look uncertain.

Here's what could shape MPWR's performance in the near term:

Strong Profitability

MPWR's trailing-12-month gross profit margin of 57.3% is 13.8% higher than the industry average of 50.4%. Its trailing-12-month net income margin and ROC are 288.3% and 257.8% higher than their respective industry averages. Also, its trailing-12-month asset turnover ratio, EBITDA margin, and ROA are 38.9%, 98%, and 421.8% higher than their respective industry averages.

Premium Valuation

In terms of forward non-GAAP P/E, the stock is currently trading at 36.46x, 102.1% higher than the industry average of 18.04x. Also, its trailing-12-month EV/Sales of 10.96x is 289.5% higher than the industry average of 2.81x. Moreover, MPWR's forward Price/Sales of 11.40x is 299.03% higher than the industry average of 2.86x.

Consensus Rating and Price Target Indicate Potential Upside

Each of the seven Wall Street analysts that rated MPWR rated it Buy. The 12-month median price target of $556.86 indicates a 42.9% potential upside. The price targets range from a low of $500.00 to a high of $630.00.

POWR Ratings Reflect Uncertainty

MPWR has an overall C rating, which equates to a Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. MPWR has a D grade for Stability and Value. Its stock beta of 1 is in sync with the Stability grade. In addition, the company's higher-than-industry valuation is consistent with the Value grade.

Of the 95 stocks in the B-rated Semiconductor – Wireless Chip industry, MPWR is ranked #54.

Beyond what I've stated above, you can view MPWR ratings for Growth, Quality, Momentum, and Sentiment here.

Bottom Line

While the firm continues to execute its long-term strategy for sustainable growth, the ongoing semiconductor shortage continues to weigh on its price performance. The stock is currently trading below its 50-day and 200-day moving averages of $427.15 and $466.71, respectively, indicating a downtrend. In addition, given that the stock is trading at a significant premium to its peers, we think investors should wait before scooping up its shares.

How Does Monolithic Power Systems Inc. (MPWR) Stack Up Against its Peers?

While MPWR has an overall C rating, one might want to consider its industry peer, Cirrus Logic Inc. (CRUS), United Microelectronics Corp. (UMC), and STMicroelectronics N.V. (STM), which has an overall A (Strong Buy) rating.

MPWR shares were trading at $406.87 per share on Tuesday morning, up $17.23 (+4.42%). Year-to-date, MPWR has declined -17.40%, versus a -20.93% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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