1 Standout Semiconductor Stock to Buy for AI Data Center Upside

The stock market is undergoing some serious late-summer volatility, with the S&P 500 Index ($SPX)recently wrapping up its best session since late 2022 - right on the heels of its worst day since 2022. While stocks are recovering from concerns over the Bank of Japan's rate hike campaign and softening U.S. jobs data, recent selling that has been heavily focused toward the tech sector has upended many of the market's big winners of 2024. 

Semiconductor stocks have been no exception, but the recent pullback presents some interesting buying opportunities for investors looking to add exposure to this rapidly growing space, fueled by advancements in artificial intelligence (AI).

One stock that's worth buying into its recent strength, though, is Monolithic Power Systems(MPWR), which offers promising upside due to its strategic positioning in AI data centers. As enterprises continue to upgrade their cloud infrastructure and services, Monolithic Power Systems looks set to benefit immensely. 

The company's performance was particularly robust in Q2, earning it high praise from analysts - including Rick Schafer of Oppenheimer, who called MPWR "a rose among thorns" for its diverse portfolio of semiconductor solutions. Here's a closer look at this standout semiconductor name.

About MPWR Stock

Founded in 1997 and based in Washington State, Monolithic Power Systems (MPWR) is a fabless semiconductor company with a market cap of $36.85 billion. It develops high-performance analog and mixed-signal integrated circuits for diverse sectors, including computing, automotive, consumer, and communications, including 4G and 5G infrastructure, across global and industrial markets.

MPWR stock has been on an upward trajectory over the past 5 years, as its shares have gained more than 400% over this time frame, led by its innovative advancements in power management technologies and strategic partnerships. More recently, MPWR shares have gained 56.8% over the past year, and are up by 31.7% on a YTD basis - outperforming the broader market by significant margins.

Is MPWR Stock a Good Buy?

In terms of valuation, MPWR shares are currently trading at 54.13 times forward earnings and 17.05 times forward sales - significantly higher than the sector median, and a premium to the stock's five-year average. 

The stock's price/earnings-to-growth (PEG) ratio of 1.73 adds a little perspective; it's right in line with the tech sector median, and marks a discount to MPWR's historical average reading above 2.00. In other words, the valuation looks a little more reasonable when stacked up against MPWR's growth forecasts.

Additionally, the semiconductor company not only offers growth potential, but pays regular dividends to its investors, with an annual yield of 0.66%. Monolithic has raised its dividends for six years in a row, and its payout ratio of 37.6% suggests the company is still dedicating plenty of earnings toward growth initiatives.

MPWR Beats Earnings Estimates

On Aug. 1, the company posted strong Q2 results that topped analysts' estimates on the top and bottom lines. Revenue came in at $507.4 million, a 15% jump from last year, and surpassed expectations by about $17 million. The Storage and Computing segment contributed $114.9 million in revenues. This strong top-line growth is primarily driven by solid demand for AI power solutions and growing orders in multiple end markets.

In Q2, the company's GAAP operating income rose to $116.5 million, up from $112.3 million last year. On an adjusted basis, MPWR reported non-GAAP EPS of $3.17, topping analysts' expectations by 10 cents per share. Gross margin narrowed slightly year over year, but still held at an impressive 55.3%.

Looking ahead, Monolithic Power projected Q3 revenue to range between $590 million and $610 million. That arrived well above the consensus forecast of $546 million.

For the full fiscal year 2024, analysts expect MPWR's EPS to rise 16.6% annually to reach $10.24, while revenue is expected to rise 18.8% to $2.16 billion.

Monolithic Power's Nvidia Partnership

Monolithic Power Systems has a strategic partnership with Nvidia (NVDA) to enhance its capabilities in the AI sector, leveraging Nvidia's advanced AI chips to improve the performance and efficiency of Monolithic's power solutions. Moreover, Monolithic Power Systems is currently contributing its expertise in power analog chips and systems, which are crucial for managing the power requirements of Nvidia's advanced AI platforms. 

This collaboration not only expands Monolithic's offerings in the AI and data center markets, but also strengthens its position in the broader semiconductor industry by tapping into Nvidia's broad tech network.

In a July analyst note, KeyBanc said that Monolithic Power Systems should continue to benefit from its relationship with the AI chip leader, noting the increased power requirements for the next-gen Blackwell chip and saying they “expect MPWR to maintain 80%+ share on NVDA Hopper/Blackwell platforms in power.”

MPWR Gets a New Street-High Price Target

As I mentioned earlier in the article, analysts weighed in bullishly on Monolithic Power Systems after the robust Q2 earnings and upwardly revised guidance for Q3. 

Oppenheimer backed its price target of $900, with analyst Rick Schafer calling MPWR “a rose among thorns” and applauding the company for “shrugging off recent peer malaise” in its quarterly results. The firm sees MPWR's diversified portfolio as a key asset within the analog space. Likewise, Stifel reiterated its own $1,000 price target, citing the company's "strikingly positive results and outlook."

KeyBanc analyst John Vinh not only maintained an "Overweight" rating after earnings, he also raised MPWR's target price from $975 to $1,075 - a new Street-high forecast for the stock. 

Overall, Wall Street analysts have a consensus "Strong Buy" rating on MPWR stock. Out of 12 analysts in coverage, 9 have a "strong buy," 2 have a "moderate buy," and 1 has a "hold" rating. 

The average price target is $913.80, indicating 8.3% upside potential from its current price. KeyBanc's new forecast implies expected upside of more than 27%.

The Bottom Line on MPWR Stock

MPWR's strategic partnerships and strong performance in the chip industry continue to win investors' confidence and drive future growth prospects. The company's robust Q2 performance and an industry-leading margin underscore its profitability and operational efficiency. Combined with its regular dividend, MPWR's solid positioning and diverse portfolio suggest it's a standout pick in the semiconductor space, with more upside ahead.