Power Integrations: On The Road To Recovery For Real Or Perhaps Not (NASDAQ:POWI)

Power Integrations (NASDAQ:POWI), a supplier of high-voltage power conversion solutions for the semiconductor industry, jumped higher after the release of the latest earnings report and in doing so reduced the substantial losses the stock racked up in 2024. The stock is still down for the year and it may be due for a pullback in the short term for several reasons, but the Q1 FY2024 report suggests POWI is on the road to recovery after earlier setbacks. Why will be covered next.

POWI is in the midst of a rally

A previous article from last February rated POWI a hold for a couple of reasons. On the one hand, the article took note of the adverse impact the downturn in the semiconductor market had on POWI, which found its way back to recent quarterly reports. On the other hand, while POWI did not deny the weakness in demand, POWI also believed a recovery was possible in the near future. With these two opposing positions, it made sense to stay on middle ground by not betting on either direction for the stock.

The chart above shows how both longs and shorts could have seen a trade go against them because the stock has moved in both directions, up and down, since then. POWI hit a new 2024 low of $62.13 as recently as April 19, but the stock has rallied since then after closing at $77.66 on May 16. The stock is still down 5.4% YTD, which means POWI has underperformed versus most semis in what has been a good year in general for the sector. The iShares PHLX Semiconductor ETF (SOXX), for instance, is up 19.5% in comparison.

It’s worth mentioning that in spite of the recent rally, the overall trend of the stock is still pointing down. Note the lower lows and lower highs of the stock in the chart above, for instance, a bearish pattern. The stock is also coming up against the upper descending trendline after the latest rally, which is likely to present resistance to the stock. This may limit further upside in the short term.

If the stock manages to break through the upper descending trendline, the stock can put an end to the current bearish trend. But this has yet to happen and the existing trend still favors lower stock prices. Now may therefore not be a good time to be a buyer of the stock for the above reasons. Keep in mind the stock is also overbought with an RSI value in the seventies after covering as much ground as it has in recent weeks. All of which could trigger a pullback and send the stock lower.

The Q1 FY2024 report suggests the recovery is underway

The rally got a big boost on May 8 when the stock gained 9.2% after the release of the latest earnings report from POWI, which surpassed expectations. The consensus, for instance, expected non-GAAP EPS of $0.13 on revenue of $90M, but POWI reported $0.18 on revenue of $91.69M. In terms of GAAP, net income was $3.95M or $0.07 per share.

Note that POWI spent about $14.6M to buy back 207K shares, which boosted EPS. POWI finished Q1 FY2024 with cash, cash equivalents and short-term marketable securities of $299.6M with no long-term debt on the balance sheet. Note that POWI has recently decided to acquire the assets of Odyssey Semiconductor. The table below shows the numbers for Q1 FY2024.

Click to enlarge

Source: POWI Form 8-K

Guidance calls for Q2 FY2024 revenue of $100-110M, down 14.8% YoY, but up 14.5% QoQ. Margins are expected to improve and using these guidelines, non-GAAP EPS is estimated to come in at about $0.25 in Q2 FY2024 or $0.07 more than in Q1 FY2024.

Click to enlarge

Source: POWI Form 8-K

How POWI is working its way out of a hole

Remember that POWI entered a downturn, which adversely affected recent quarterly results due to the drop in demand. Quarterly revenue, for example, has declined YoY for seven consecutive quarters, starting in Q3 FY2022 and guidance calls for number eight. The recent quarterly improvement on a sequential basis is therefore a positive since it suggests POWI is recovering from the downturn.

Furthermore, book-to-bill was above one in Q1 FY2024, a sign demand is getting stronger. From the Q1 FY2024 earnings call:

“In terms of bookings, as I mentioned December was a strong month and that strength continued throughout Q1 except of course, took a dip in February because of the Lunar New Year, which is expected. And then the strength continued through April. So that’s a very good news. And in Q1 our book-to-bill was more than one for the first time in a one in one year. So that’s again a very good sign.”

Source: POWI earnings call

POWI is on track to earn $0.43 in H1 FY2024, using the midpoint of Q2 guidance, and if we assume the recent improvement continues and extrapolate it into the future, then FY2024 non-GAAP EPS could end up at around $1.35 on revenue of $455M. In comparison, POWI earned $1.29 on revenue of $444.5M in FY2023.

The difference may not seem all that much, but keep in mind the numbers got worse as FY2023 came to an end, whereas the opposite is expected in FY2024. Such a top line would result in a P/E ratio of 57.5x for POWI with the stock at $77.66, which is not only well above where POWI has traded in the last five years at an average of 37x, but also more than twice as high as the median in the sector at 24x. In terms of GAAP, the disparity is even greater.

The worst has passed or has it?

According to the latest Investor Presentation held on May 1, POWI sees its addressable market doubling in size in the FY2022-2027 period. Accordingly, the financial model targets revenue growth with a CAGR in the low double digits, non-GAAP gross margin of 50-55% and non-GAAP operating margin of 25-30% in FY2022-2027.

Revenue was $651.14M in FY2022, the base year, and assuming revenue grows at a CAGR of 13% in the next five years, then FY2027 revenue could end up at $1,199.68M. If we then assume net margin is slightly below operating margin at 25%, then this results in net income of about $300M, which translates to non-GAAP EPS of $5.29 with the number of outstanding shares at 56.74M. Apply a P/E multiple of 37x, the average in the last five years, and the result is a stock price of $195.73 by the end of FY2027. This is well above where the stock trades at right now at $77.66.

The above, in combination with the sequential improvement in quarterly results, helps explain why POWI trades at fairly high multiples. A lot of growth is expected out of POWI in the next several years and there is admittedly reason why this could happen. The market for power semiconductors based on GaN is expected to expand rapidly and this could drive POWI higher.

However, it’s worth mentioning that while it appears POWI is on the path of recovery after a downturn, it is not the first time that POWI was thought to be past the trough. At this time, it appears the worst is over for POWI, to be followed by sequential growth from here on out, but if this turns out to be premature, it will not be the first time this has happened.

Remember how POWI called for the trough as early as Q4 FY2022/Q1 FY2023. And while this appeared to be correct initially because of the sequential growth in the following quarters, it turned out that POWI was premature to be calling for the bottom because the numbers proceeded to deteriorate once again in Q4 FY2023. This could happen again.

Investor takeaways

POWI has done well recently. The most recent earnings report and Investor Presentation both had positive news to share, which helped propel the stock upwards after a dismal showing earlier in the year. However, the stock may have a harder time in the near term for several reasons, including being overbought and potential resistance. There are several reasons why being a buyer at this junction could backfire.

The latest guidance suggests POWI is recovering from the downturn that has hit the top and the bottom line. The numbers are still way down, but the sequential improvement, combined with a book-to-bill above one, is cause for optimism. Add the latest numbers presented by POWI to investors, which suggest the stock price could more than double in the next few years, and you can see why long POWI may look enticing to some.

However, POWI has made false starts on the road to recovery before. It is not the first time the bottom was believed to be in after the numbers improved sequentially, only for demand to drop once again in subsequent quarters. It is possible the recovery is for real this time around, but the possibility that POWI could encounter further setbacks as it tries to recover from the recent blows to sales and profits, like it has before, cannot be dismissed.

I am therefore neutral on POWI. Those who are more tolerant of risk may want to roll the dice on POWI. If POWI is indeed past the trough and growth comes close to that envisioned by the current financial model, POWI might be a bargain at current prices. POWI might have a lot of rapid growth ahead, assuming POWI is past the trough and POWI hits the targets set in its financial model. Multiples may seem high at this time, but if POWI grows as fast as modeled, they can come down in no time.

On the other hand, others may want to take heed of what has happened in the recent past. It’s not the first time POWI has appeared to be on the road to recovery, only for the recovery to be derailed. If it happens again, the stock could resume the recent slide. The charts still favor a decline in the price of the stock, among other things. The stock is likely due for a pullback after the recent rally. The last report was a positive sign things are heading in the right direction, but more needs to happen to convince everyone long POWI is worth the risk.