Monolithic Power Earnings: Choppy End Markets in 2023 Don’t Deter Our Long-Term Confidence

We maintain our $535 fair value estimate for wide-moat Monolithic Power Systems’ MPWR shares after its second-quarter results and third-quarter guidance met our expectations. We see MPS’ execution as solid amid customers continuing to work through excess inventories and offering low order visibility. MPS is a meaningful secondary beneficiary of the recent surge in artificial intelligence spending, but its growth in AI sales is partially offset by lower spending allocation to traditional computing. We reiterate our view that MPS is well-positioned for strong, long-term growth with highly differentiated chips that can benefit from secular trends like AI and electrified vehicles. We believe the 7% selloff after reporting reflects the market being overly focused on near-term market dynamics. We see shares as fairly valued.

Second-quarter sales of $441 million declined 4% year over year and 2% sequentially. Data center spending declined steeply year over year, as did consumer and communications sales. We don’t believe data center declines reflect a weakening position or depressed long-term prospects—just off-kilter spending patterns from customers in the near term. Automotive sales continued to grow strongly, as did sales into notebooks. We see MPS successfully ascending the value chain in the automotive market, and believe upcoming applications for battery management systems in electric vehicles and eventual silicon carbide onboard qualification will pave the runway for more growth.

Non-GAAP gross margin declined 120 basis points sequentially and 250 basis points year over year to 56.5%. MPS’ margins are depressed from lower factory utilization in the face of choppier demand, and we expect improvement to begin near the end of 2023.

Third-quarter guidance implies another year-over-year sales decline, but a midpoint of $474 million implies 7% sequential growth. We expect seasonal strength for MPS’ notebook and consumer sales ahead of the holiday season.