Will Chip Woes Dent Monolithic's (MPWR) Healthy Growth Momentum?
Shares of Monolithic Power Systems, Inc. MPWR were up $16.85 or 3.9% in yesterday’s trading session, buoyed by an impressive run of late led by solid quarterly performance and healthy demand trends. This semiconductor chip manufacturer is likely to maintain this growth momentum in the coming quarters as supply chain imbalance due to chip shortage is expected to gradually ease.
Monolithic has strong growth opportunity due to its robust product portfolio that targets In-Car connectivity and infotainment, advanced driver assistance system (ADAS) and rapid adoption of LED lighting in cars and vehicles. Automotive is one of the foremost industries that is benefiting from the emergence of Internet of Things (IoT) and Artificial Intelligence (AI). The increasing demand for analog ICs and sensors bodes well for semiconductor component providers like Monolithic. On the recent earnings call, management has stated that the company is winning increasing dollar content in the automotive market. Moreover, its deep-rooted partnerships with leading auto suppliers will likely boost the top line.
Apart from automotive, Monolithic invests in markets like industrial, server and communication services that have strong growth potential over the long term. The ongoing adoption of cloud computing is driving demand for servers, which bodes well for the company’s power management solutions. We expect Monolithic to benefit from the ongoing Grantley to Purley platform conversion in the server market. Higher dollar content in new servers based on Purley is expected to drive incremental revenues. Management anticipates cloud computing to be a notable growth driver, particularly due to the increasing demand for solid state drives and servers.
Being a fabless company, Monolithic works with third-party contractors and chip assemblers for the manufacturing, assembling and testing of wafers and ICs. This approach permits it to focus more on the designing and development of process technology at a lower-fixed cost. Unlike other fabless semiconductor companies, Monolithic installs its own proprietary process technologies in third-party contractors’ equipment and facilities. It claims that this proprietary process helps in achieving higher level of integration within its chips.
However, Monolithic is exposed particularly to the demand environment in China, which is at present quite sluggish. Further, the imposition of tariffs owing to the trade war between the United States and China is anticipated to affect its prospects to some extent. Nevertheless, we remain impressed with the inherent growth potential of the stock.
Monolithic currently has a Zacks Rank #3 (Hold). The stock has gained 38.3% in the past year compared with the industry’s rise of 17.8%.
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Microchip Technology Incorporated MCHP, carrying a Zacks Rank #2 (Buy), is a solid pick for investors. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
It has a long-term earnings growth expectation of 20.3% and delivered an earnings surprise of 3.5%, on average, in the trailing four quarters. Microchip is one of the fastest-growing providers of 8-bit, 16-bit and 32-bit microcontrollers in the world. The microcontroller business of the company continued to outperform the industry and enabled it to gain significant market share.
Analog Devices, Inc. ADI, carrying a Zacks Rank #2, is another key pick. It has a long-term earnings growth expectation of 12.3% and delivered an earnings surprise of 6%, on average, in the trailing four quarters.
Analog Devices is reportedly the second-largest producer of analog chips. The company should benefit from its strong market position in high-performance analog (HPA), especially in the industrial, communications infrastructure and consumer markets. Within HPA, Analog Devices has a leading market position in converters, where it has around half the market share. It also has a commanding position in the digital signal processor market.
NXP Semiconductors N.V. NXPI carries a Zacks Rank #2. It has a long-term earnings growth expectation of 22% and delivered a modest earnings surprise of 3.2%, on average, in the trailing four quarters.
NXP’s automotive business has a strategic importance and high growth opportunities. It accounts for nearly half the company’s revenues. NXP designs and develops products for the ADAS, infotainment, in-vehicle networking, as well as electric powertrain applications, among others.
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