Can This 'Strong Buy' Semiconductor Stock Top $1,000?

The artificial intelligence (AI) revolution has profoundly impacted the global economic order, shaking up enterprises across a wide spectrum of industries. After gaining mainstream prominence following the widespread popularity of OpenAI's ChatGPT in 2022, AI-related stocks have been massive wealth creators for the better part of the last two years.

Further, with AI expected to become a $1 trillion-plus market by 2032, it looks like there's plenty of runway for growth, as tech titans including Microsoft (MSFT), Google (GOOGL), Amazon (AMZN) and Tesla (TSLA) all invest billions to bulk up their AI capabilities.

However, the proliferation of AI is made possible by a critical component known as semiconductors. Semiconductors are materials that can enable or disrupt the flow of electrical conductivity between conductive and non-conductive materials. Think of semiconductors as tiny switches that can be turned on or off to control the flow of electricity. 

Semiconductors play a crucial role in AI. The complex calculations and data processing required for AI applications are made possible by the vast number of interconnected transistors (tiny switches) found in semiconductors. These transistors allow for the rapid processing of information, which is essential for AI algorithms to learn, reason, and make decisions. Projected to become a trillion-dollar industry by 2030, semiconductors are an elemental piece of AI architecture.

Monolithic Power (MPWR), a Washington-based semiconductor company, is expected to be one of the key beneficiaries of this trend. Recently, brokerage firm Truist Financial increased the target price for its stock citing better end market growth expectations. However, with the shares already up 104% year over year, how high can MPWR rise? Here's what Wall Street is forecasting.

About Monolithic Power

Founded in 1997, Monolithic Power (MPWR) is a global leader in the design, development, and manufacture of high-performance, semiconductor-based power electronics solutions. The company's products are used in a wide range of applications, including computing, storage, automotive, industrial, and consumer electronics. This company currently commands a market cap of $44.9 billion.

MPWR stock has had a stellar run in 2024 so far, up 48.3% year to date to outperform both the S&P 500 Index($SPX) and the Nasdaq Composite($NASX). 

MPWR stock also offers a dividend yield of 0.54%, backed by six consecutive years of growth. The quarterly payout currently stands at $1.25 per share.

Strong Fundamentals

Monolithic Power has a robust financial position, thanks in part to its fabless business model. Over the last 10 years, the company's revenues and earnings have compounded at impressive CAGRs of 22.0% and 29.78%, respectively.

Moreover, the results for the second quarter beat expectations, with both revenue and earnings surpassing estimates. In Q2 2024, Monolithic reported revenues of $507.4 million, up 15% from the previous year. Its largest segment - Enterprise Data - saw its revenues almost quadruple to $187.2 million, compared to $47.9 million in the year-ago period.

Earnings improved by 12.4% year over year to $3.17, coming in ahead of the Street's expectations for EPS of $3.07. This marked the 15th consecutive quarterly earnings beat by MPWR.

Monolithic Power ended the quarter with cash and equivalents of $1.31 billion, up from $1.29 billion at the end of the first quarter. During Q2, MPWR generated operating cash flow of approximately $141 million.

Competitive Advantages

Monolithic has seen significant growth in its Enterprise Data segment, which now contributes almost 37% of total revenue, up from single-digit percentages pre-pandemic. This surge is driven by enterprises opting for Monolithic's compact power systems, which integrate multiple power stages into a single chip. These smaller systems reduce costs, save space, and lower energy and cooling expenses, making them ideal for the limited real estate on circuit boards. 

The company's leadership in miniaturization, demonstrated by its ability to achieve a 55nm process for its BCD chips while competitors remain at 90nm, highlights its efficiency and innovation. Also, Monolithic’s portfolio includes over 1,700 patents, reinforcing its cutting-edge capabilities.

Notably, Monolithic Power is well-diversified both geographically and across product applications. The U.S. and China each account for roughly one-third of its sales, with the remainder coming from Europe and other parts of Asia. Its products are widely used in industries ranging from Advanced Driver Assistance Systems (ADAS) to cloud storage, 5G, robotics, and smart meters. 

As MPWR evolves from a simple chip supplier into a comprehensive solutions provider, it is well-positioned to capitalize on expanding market opportunities across these diverse sectors.

Analysts Say MPWR Stock is a Strong Buy

Analysts have a rating of “Strong Buy” for MPWR stock overall, with although the mean target price of $945.89 is only about 1% higher than current prices.

Truist analyst William Stein recently upped his price target to $994, just shy of the millennium level, suggesting MPWR could rally 6.2%. The Street-high target price of $1,100, which is now shared by analysts at both TD Cowen and Stifel, indicates upside potential of 17.5%. 

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On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.