Today we're going to take a look at the well-established Monolithic Power Systems, Inc. (NASDAQ:MPWR). The company's stock saw a significant share price rise of over 20% in the past couple of months on the NASDAQGS. As a large-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. But what if there is still an opportunity to buy? Let’s examine Monolithic Power Systems’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
What Is Monolithic Power Systems Worth?
According to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average, the stock currently looks expensive. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Monolithic Power Systems’s ratio of 53.08x is above its peer average of 17.58x, which suggests the stock is trading at a higher price compared to the Semiconductor industry. But, is there another opportunity to buy low in the future? Since Monolithic Power Systems’s share price is quite volatile, this could mean it can sink lower (or rise even further) in the future, giving us another chance to invest. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.
What does the future of Monolithic Power Systems look like?
Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. Monolithic Power Systems' earnings over the next few years are expected to increase by 69%, indicating a highly optimistic future ahead. This should lead to more robust cash flows, feeding into a higher share value.
What This Means For You
Are you a shareholder? It seems like the market has well and truly priced in MPWR’s positive outlook, with shares trading above industry price multiples. However, this brings up another question – is now the right time to sell? If you believe MPWR should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping tabs on MPWR for some time, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the positive outlook is encouraging for MPWR, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.
So while earnings quality is important, it's equally important to consider the risks facing Monolithic Power Systems at this point in time. While conducting our analysis, we found that Monolithic Power Systems has 1 warning sign and it would be unwise to ignore this.
If you are no longer interested in Monolithic Power Systems, you can use our free platform to see our list of over 50 other stocks with a high growth potential.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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