Power Integrations (NASDAQ:POWI) has staged a strong rally in recent days. This happened even though guidance in the latest earnings report on November 7 missed consensus estimates by a mile, which caused the stock to come close to matching the 52-weeks low after a selloff the following day. However, while the rally in recent days may lead some to conclude the Q3 FY2023 report was perhaps not so bad after all on second thought, there is still reason to be concerned about what is going on at POWI. Why will be covered next.
POWI comes up short
A previous article from last July, which rated POWI a hold for a number of reasons, did so even though POWI was in the midst of a powerful rally at that time that saw it appreciate by about 40% in less than three months, something that in all likelihood attracted the interest from the momentum crowd. This rally was in part powered by the belief the downturn, which had slashed sales and profits at POWI, was past the trough and POWI was on the verge of an upswing in the second half of 2023.
However, while POWI had pretty much called for an end to the recent downturn, the article expressed doubts as to whether the headwinds, particularly in the form of soft demand, had truly passed. After all, POWI had already shown to be overly optimistic in determining whether the bottom was in on at least one prior occasion. The article also noted how China’s decision to impose export controls on gallium could come back to affect POWI, especially with POWI focusing heavily on gallium nitride or GaN, which requires gallium.
These concerns proved to be warranted in light of the latest report released on November 7, which missed expectations due to weaker-than-expected demand. The report suggested that it was premature to be calling for an end to the current downturn that has led to declining demand. First, POWI missed consensus estimates for the top and the bottom line.
The consensus was looking for non-GAAP EPS of $0.47 on revenue of $130.4M, but POWI reported non-GAAP EPS of $0.46 on revenue of $125.5M. While both represent an improvement QoQ, they are still well below last year’s numbers. POWI had $346M of cash and investments on the balance sheet with no debt. The table below shows the numbers for Q3 FY2023.
(Unit: $1000, except EPS) |
|||||
(GAAP) |
Q3 FY2023 |
Q2 FY2023 |
Q3 FY2022 |
QoQ |
YoY |
Revenue |
125,511 |
123,223 |
160,233 |
1.86% |
(21.67%) |
Gross margin |
52.5% |
51.0% |
57.4% |
150bps |
(490bps) |
Operating margin |
14.1% |
10.3% |
30.2% |
380bps |
(1610bps) |
Income from operations |
17,712 |
12,641 |
48,371 |
40.12% |
(63.38%) |
Net income |
19,796 |
14,793 |
45,964 |
33.82% |
(56.93%) |
EPS |
0.34 |
0.26 |
0.80 |
30.77% |
(57.50%) |
(Non-GAAP) |
|||||
Revenue |
125,511 |
123,223 |
160,233 |
1.86% |
(21.67%) |
Gross margin |
53.3% |
51.8% |
57.8% |
150bps |
(450bps) |
Operating margin |
20.0% |
16.1% |
32.4% |
390bps |
(1240bps) |
Income from operations |
25,099 |
19,875 |
51,871 |
26.28% |
(51.61%) |
Net income |
26,603 |
21,011 |
48,348 |
26.62% |
(44.98%) |
EPS |
0.46 |
0.36 |
0.84 |
27.78% |
(45.24%) |
Source: POWI Form 8-K
The Q3 results were a letdown, but the real surprise was Q4 guidance. Guidance calls for Q4 FY2023 revenue of $85-95M, a decline of 27.9% YoY at the midpoint. This is far short of the $138M expected. The forecast sees non-GAAP operating expenses of about $42.5M and gross margins are expected to be similar to that of the preceding quarter. Using these guidelines from POWI, non-GAAP EPS is estimated to be around $0.14-0.16 in Q4 FY2023, below Q4 FY2022’s $0.48.
Q4 FY2023 (guidance) |
Q4 FY2022 |
YoY (midpoint) |
|
Revenue |
$85-95M |
$124.8M |
(27.88%) |
Source: POWI Form 8-K
Management added some color to the latest results as they were not what people were expecting, certainly not after the upbeat earnings call comments from earlier in the year.
“the downturn has surprised us as it did surprise other people. We really thought when the bookings came out strong in March through May, we are on a rebound. And I think our customers thought that as well. And obviously, the demand didn’t show up. And so now they have — still stuck with inventories, especially in appliances and industrial markets. And — so that’s the reason why this has become a real reset in revenue for us.”
A transcript of the Q3 FY2023 earnings call can be found here.
Is POWI repeating the mistakes of the past?
However, similar to what POWI did before in the recent past, POWI called for an improvement soon. POWI sees a recovery starting as soon as Q1 FY2024.
“But from everything we know, we are optimistic that Q1 will be higher than Q4, but we don’t know by how much. And we are hoping that from that point onwards, it will continue to grow.
And at some point, it has to come back. This is not — this is way below the trend line. I am surprised it’s taking so long to clear the inventory is obviously because the demand is low or well below where everybody was expecting it to be. the demand has to come back at some point.”
Keep in mind that this is not the first time POWI gave an upbeat prognosis of an imminent recovery, only for this assessment to turn out to have been overly optimistic, which then forced POWI to revise its prognosis in subsequent earnings calls. For instance, recall how POWI stated a year ago in its Q3 FY2022 call that Q4 FY2022 would represent the trough in the downturn.
Q1 FY2023 was expected to stay flat compared to Q4 FY2022, followed by incremental growth and an upturn starting in H2 FY2023. From the Q3 FY2022 earnings call:
“So going to Q1 quarter, our best estimate is we would be similar to Q4 and then Q2, our expectation is that it’ll be incremental growth, but second half is where we expect a stronger demand as this downturn turns into an upturn. That’s our best estimate right now.”
As it turned out, POWI proceeded to disappoint in Q4 FY2022 with Q1 FY2023 guidance that was way below expectations, similar to the most recent quarter. Q1 FY2023 hit new lows that POWI suggested would not be forthcoming and in a repeat, Q4 FY2023 is now forecast to hit lows that were not supposed to be in the pipeline.
Not only would Q4 FY2023 be the worst quarter since Q1 FY2019, but it calls into question everything that was assumed to be true about the recent downturn. Previously, the assumption was that the downturn had passed, based on POWI’s own assessment of where things were heading. It was thought Q1 FY2023 was the trough in the recent downturn, and Q4 FY2022 before that, but guidance is now calling for a new low in Q4 FY2023. Granted, trying to predict the future is difficult. Still, the repeated about-faces by POWI does not inspire confidence in POWI or its ability to properly assess the situation.
The stock stages a comeback
Nevertheless, the stock has staged a comeback of sorts in recent days. The stock closed at $77.21 on November 17, which means POWI has gained 10.2% after closing way off the lows at $70.04 on November 8 after the Q3 report. POWI is now back in positive territory with a gain of 7.7% YTD after being down for the year after the Q3 report. The chart below shows how the stock is now trading higher than shortly before the Q3 report.
Note how the stock dropped to as low as $67.07 on November 8 post-earnings and in doing so came close to wiping out all the gains following the 52-weeks low of $66.90 on November 1. This rally following November 1 was not by accident. POWI presented its latest Investor Presentation on November 1, which included, among other things, an outlook calling for strong gains in the top and the bottom line in the coming years.
The 3-5 year model presented by POWI aims for revenue to grow at a CAGR in the low double digits. This is much faster than what POWI has been able to achieve in recent years, especially if one excludes FY2021-2022, which benefited from COVID-19 stimulus. CAGR for the last ten years is in the low-to-mid single digits. FY2023’s projected revenue of $445M is not far from FY2017 revenue of $431M.
This revenue growth is expected to be assisted by a doubling in serviceable addressable market or SAM. GaN is expected to play a key role here. The model sees non-GAAP gross margin rising to as high as 55% and non-GAAP operating margin to as high as 30%. In comparison, non-GAAP gross margin currently stands at 52.2% and non-GAAP operating margin is at 16.5% YTD.
With these upbeat numbers it is not that difficult to see why the stock has rallied in the wake of the Investor Presentation. However, while some may be willing to join the rally, others may decide to sit it out as there are a couple of reasons to do so. Multiples for POWI, for instance, are higher than most semis. For example, POWI trades at 63 times forward non-GAAP earnings with a trailing P/E of 50, higher than the median at 22x and 20x respectively. The table below shows some of the commonly references multiples for POWI.
POWI |
Sector median |
|
Market cap |
$4.40B |
– |
Enterprise value |
$4.05B |
– |
Revenue (“ttm”) |
$479.8M |
– |
EBITDA |
$94.4M |
– |
Trailing non-GAAP P/E |
49.50 |
19.50 |
Forward non-GAAP P/E |
62.88 |
22.38 |
Trailing GAAP P/E |
68.32 |
24.59 |
Forward GAAP P/E |
104.82 |
26.62 |
PEG GAAP |
– |
0.88 |
P/S |
9.15 |
2.55 |
P/B |
5.61 |
2.69 |
EV/sales |
8.43 |
2.63 |
Trailing EV/EBITDA |
42.88 |
15.36 |
Forward EV/EBITDA |
37.54 |
14.16 |
Source: Seeking Alpha
There is also an argument to be made that POWI is trading above fair value. Fair value is subjective, but if, for instance, we assume POWI comes close to reaching the goals as laid out in the Investor Presentation mentioned earlier, and EPS grows by an estimated 30% per year on average over the next five years and with TTM EPS of $1.55, then an argument can be made that fair value is $46.50. This is way below the current stock price of $77.21.
Investor takeaways
I am neutral on POWI. The stock has done pretty well in November considering the disastrous guidance in the latest report. The market seems to be giving POWI the benefit of the doubt by assuming the numbers will soon improve after Q4 FY2023 as suggested in the earnings call. The latest Investor Presentation called for major gains in the top and the bottom line in the coming years, which seems to be giving the stock a lift since it was released on November 1.
However, not everybody will be so forgiving of POWI, especially after what has transpired in recent quarters. POWI’s track record in terms of assessing the outlook has been very shaky lately. POWI has demonstrated a tendency to be overly optimistic, which has led, among other things, to prematurely calling for the bottom multiple times.
This track record is reason why some may be skeptical when POWI is suggesting another imminent recovery. It also raises doubts whether POWI is not being overly optimistic when it put together the financial goals in its presentation. Yes, it is possible to grow faster with say GaN gaining prominence, but keep in mind the expected growth is much faster than what POWI has achieved in the last decade. POWI may also be too expensive of a stock, including in terms of multiples, and that is assuming POWI comes close to growing as fast as it aims for.
Bottom line, in the end it comes down to how much faith one wants to put in POWI. POWI has been wrong multiple times, but it’s possible POWI is right this time. If someone believes Q4 FY2023 is the bottom, followed by an upturn that will cause POWI to achieve its goals as spelled out in the Investor Presentation, then long POWI may be worth considering. If not and someone is, for instance, bothered by POWI’s repeated going back on past statements, then it may be best to stay on the sidelines and not get caught if or when POWI comes up short once again.
Read the full article here