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Morningstar | Monolithic’s Dramatic Revenue Growth Looks Likely to Continue; Initiating with $130 FVE

We are launching coverage of power and analog chip designer Monolithic Power Systems with a $130 fair value estimate and note that shares are currently fairly valued in our opinion. While we would advise investors to wait for a margin of safety, we believe the firm’s strong revenue growth and improving operating leverage make this a company worth watching. We believe Monolithic has demonstrated marked expertise in designing integrated power solutions for a variety of end markets, which should enable it to benefit from several secular growth trends. In our view, the firm’s outperformance in these markets has been a result of highly engineered expertise that has thus far been difficult to replicate. We also believe the design wins and resulting share gains in sticky market areas like automotive safety systems and industrial controls come with customer switching costs. In sum, we believe Monolithic boasts a combination of intangible assets and switching costs and warrants a narrow economic moat rating.

Monolithic boasts a portfolio of thousands of power conversion, charging, switches, and lighting products that we believe make it well-placed to benefit from the secular growth trends in a variety of markets. This includes trends like artificial intelligence and machine learning, which are increasing the demand for dynamic power solutions in data centers, while in the industrial market, the firm’s sensing and motor control solutions should enable it to profit from the growth of factory automation and robotics. In automotive, the firm’s lighting solutions have already reaped gains from the growth of infotainment and digital clusters (which we expect to continue), while other power solutions should benefit from longer-term opportunities in battery management and driving-assistance systems.

We expect solid growth in the industrial, automotive, and data center end markets, which should account for much of the firm’s strong performance. However, competition from large peers like NXP Semiconductors, Texas Instruments, and Analog Devices could cause the firm to miss its ambitious revenue and profitability targets. While Monolithic’s portfolio of highly engineered and differentiated technology may give it an edge in certain applications today (QSMod in servers, for example), the scale of its peers’ resources may not allow it to maintain its strong rate of design wins and share gains.