The use case growth for semiconductors is getting lost in endless headlines about shortages and cyclicality.
It’s a big opportunity for investors.
On Friday, Khaldoon Al Mubarak, the controlling shareholder at GlobalFoundaries (Nasdaq: GFS), made a stunning statement.
He expects sales of semiconductors to reach $2 trillion by the mid-2030s. The sector is currently tracking a $500 billion clip.
Let’s be clear: End buyers are the reason for the current semiconductor shortages.
Enticed by just-in-time (JIT) inventory accounting, many of the world’s biggest semiconductor buyers cut orders in early 2020 when the global pandemic landed in North America.
In hindsight, it was a catastrophic mistake.
Microprocessor foundries, the companies that manufacture chips on a contract basis, didn’t sit idle waiting on new orders from the likes of General Motors (NYSE: GM) and Toyota Motors (NYSE: TM).
Overwhelming demand from other buyers in consumer electronics, appliances, computers and smartphones was more than enough to fill the void.
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It’s the untold story of semiconductors.
While investors are focused on shortages and the prospect that chipmakers may build too much capacity, the real problem for the foreseeable future is actually too much demand.
Semiconductor use cases are growing exponentially, and there’s one company already dominating the sector: Monolithic Power Systems (Nasdaq: MPWR).
Monolithic Power Systems designs the tiny integrated circuits used to control power supply.
These chips are used primarily in cloud computing infrastructure, telecommunications, consumer electrics, industrial and automotive applications. And they are essential.
The company has a distinct advantage over competitors because its modules integrate all the power functions into a single silicon die.
Being ultracompact is a big deal when space is at a premium on boards that are becoming denser and smaller.
This advantage is showing up in contract wins and steady sales growth.
Revenues in 2020 reached $844 million, up 34.4% year over year. According to FactSet, analysts expect sales will balloon this year to $1.2 billion, a rise of 41%. Profits and dividends have followed.
Monolithic Power is an exceptionally well-run business.
At 56.2%, its gross margins are 14% better than the industry average. And profit margins beat the industry by 200%.
In November, MPWR reported that earnings soared to $77 million, up 28.3% from a year ago. Later in the month, CEO Michael Hsing announced a 60-cent quarterly dividend.
More important, Hsing is furiously building capacity to support $2 billion in annual sales as the chips that the company produces find more uses.
He recently pointed out that new cars use three times the number of chips. And with the electric vehicle (EV) transition, that number will grow even further.
And that’s also the story being told by Mubarak.
As manager of the Abu Dhabi Investment Authority, he oversees $240 billion in assets. His fund is also the largest shareholder in GlobalFoundries, a major chip maker.
On Friday, Mubarak told CNBC that Global will continue to build new manufacturing facilities in front of industry sales that should quadruple during the next 15 years.
It makes a lot of sense ... chips are in everything these days as devices like washing machines and toothbrushes become smart. Some of this is connectivity.
Adding devices to the so-called Internet of Things (IoTs) has been a big push for years.
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Manufacturers of consumer products see connectivity as an engine for a new upgrade cycle. Meanwhile, industrial companies are gearing up for a much bigger productivity play. This means more connected factory robots. It also means next generation sensors, another fertile space for semiconductor growth.
Monolithic Power plays in all these businesses.
The company sells its power supplies to Asian firms that make cell phone chargers, game console makers and the big tech companies building bespoke computer boards for giant server farms. Monolithic is also building out a considerable automotive business.
Through parts suppliers Delphi, Bosch, Panasonic Automotive (OKC: PCRFY), Magna (NYSE: MGA) and Mitsubishi Electric (OTC: MSBHF), Monolithic reaches end customers such as Ford (NYSE: F), Nissan (OTC: NSANY), BMW (OTC: BMWYY), Mercedes, General Motors, Volvo (OTC: VLVLY), Toyota, Volkswagen (OTC: VWAGY) and Kia.
At a price of around $482.99, Monolithic Power currently trades at about 56.7 times forward earnings and about 19.8 times sales.
While this may seem pricey, keep in mind that shares have traditionally traded at a premium to the market and its competitors. It’s justified.
Savvy longer-term investors should strongly consider buying into any near-term weakness.
Based on sales growth, I think there’s a strong possibility the stock could trade to $600 in 12 months, which would translate to a gain of 30% from a $460 entry point.
Best wishes,
Jon D. Markman
