Monolithic Power Eyes Better, Faster, Smaller Chips

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Computer-chip maker Monolithic Power Systems might not be a household name, at least compared to rivals such as Intel, Qualcomm and Texas Instruments.

But anyone who has fired upSony 's ( SNE ) PlayStation 4 orMicrosoft 's ( MSFT ) Xbox One video game consoles or used a Blu-ray or DVD player has usedMonolithic Power 's ( MPWR ) state-of-the-art technology.

The San Jose, Calif.-based company designs semiconductors, integrated circuits and other building blocks found in computers, medical equipment, LCD monitors, flat-panel TVs, set-top boxes and many other consumer electronics.

One of Monolithic's advantages over rivals is its ability to get more from less, analysts say. Some of its modules are 90% smaller than those of competitors, use less energy and work faster.

"I characterize their growth as growth by a thousand cuts, because they have so many design wins across so many different end markets," said Michael Lucarelli, an analyst at Evercore Partners.

Lately, Monolithic's growth has moved into a higher gear. The company has run off three straight quarters of double-digit revenue gains, which hadn't happened in years.

Outpacing Its Industry

During this year's first quarter, Monolithic logged revenue of $60.1 million, a gain of 17% from the previous year. That growth rate far outpaced the industry's average sales growth rate of 10%, according to Thomson Reuters.

Meanwhile, Monolithic's stock price touched an all-time high of 43.49 on July 1 and is up about 20% since the beginning of the year.

Using a fabless business model, Monolithic focuses solely on design and engineering. It outsources manufacturing to a third party to keep costs low.

This model has helped Monolithic produce steady profits through the years, even though profit growth has fluctuated. First-quarter earnings this year more than doubled from a year earlier to 39 cents a share, topping analyst views for 33 cents.

Monolithic is due to report second-quarter results on July 24. Analysts polled by Thomson Reuters expect EPS of 35 cents, a gain of 46% from the prior year. Sales are seen rising 16% to $67.1 million.

On June 9, the company announced that it will pay a dividend of 15 cents per share for the second quarter.

"Their dividend initiation is a signal to the investing world that they're confident in their near-term and long-term outlook," Lucarelli said. "They plan on growing that as the design wins turn into revenues. They want to make shares more attractive to shareholders."

More Growth Ahead

Angelo Zino, an analyst at S&P Capital IQ, says that Monolithic can generate sales growth at an annualized rate of over 20% per year over the next three to five years.

"There has been a major transformation that's taken place since 2011," Zino said. "They've been able to diversify their market to new areas: industrial, automotive, cloud computing."

Consumer products used to account for about 70% of Monolithic sales. But by next year, they should account for around 50% as the company develops more components for commercial products, which carry higher profit margins, Lucarelli says.

Although the consumer electronics market grows quickly, the products are not always profitable and may have short life cycles.

One product that the company is bullish about is a high-current battery charger for tablets and battery packs, introduced a few quarters ago.

These new chargers "deliver the best efficiency performance in the market, which equates to faster time to charge for users," Monolithic Chief Financial Officer Meera Rao said.

In addition, she says, Monolithic introduced the industry's first massive 900-volt flyback regulator designed specifically for industrial power-grid applications supporting wireless communication.

"This product saves our customers from having to include a high-voltage blockage device," Rao said. "And due to its high integration, it allows for improved ease of use, high reliability and the lowest overall solution cost."

Monolithic Power Module (MPM) solutions are roughly two years ahead of the competition and are expected to help drive Monolithic's growth over the next several years, Anil Doradla, an analyst with William Blair, wrote in a client note last month.

"While the company's competition is able to offer only discrete solutions (that include multiple chips and are less power-efficient), Monolithic Power is able to differentiate its products by providing customers integrated solutions with superior performance," Doradla added.

One risk for Monolithic is that its design wins don't guarantee that manufacturers will use its chips in their end products, and the company does not receive any payments up front.

130 Days Of Inventory

Manufacturers might not need as many chips as they initially ordered, which can leave chipmakers with a glut of inventory. Monolithic currently has about "$40 million in inventory, or about 130 days' worth, which is about average for them," Lucarelli said.

The chip industry globally is split between five major players:Intel ( INTC ),Qualcomm ( QCOM ),Taiwan Semiconductor Manufacturing (TSM),Texas Instruments (TXN) and SK Hynix.

These five accounted for about 30% of industry sales and half of its profits as of 2013's third quarter, according to AlixPartners' 2014 Global Semiconductor Industry Outlook.

The industry struggles with heavy price competition, high production costs and products with a short shelf life, the AlixPartners report said.

Monolithic's own sales prospects are sensitive to ebbs and flows in consumer spending because of its heavy focus on consumer electronics.

"If we see significant downturn in the economy or in consumer spending, that would likely have a bigger impact on Monolithic than your typical semiconductor company," Zino said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: SNE , MSFT , MPWR , INTC , QCOM

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