Automakers halt production.
Computer and smartphone producers report a slowdown in production.
These are just two of the headlines we’ve seen in recent months related to a major concern in technology: a lack of semiconductors. The small electronic circuits are essential for computing and memory, digital displays and even to operate a bullet train.
The problem is the COVID-19 pandemic, which caused a shutdown in the production of these components and created a global shortage of semiconductors.
Without them, the pace to manufacture cars, smartphones and computers can’t keep up with demand.
But that demand isn’t going away, and big chip users such as Ford Motor Co. (NYSE: F), Samsung (OTC: SSNLF), Intel Inc. (Nasdaq: INTC) and others are looking beyond traditional large chip foundries to get the chips they need.
That led me to today’s stock.
Using Adam O’Dell’s proprietary six-factor Green Zone Ratings system, I found a semiconductor manufacturer with the potential to grow its revenue 86% in the next two years — making it a solid company for your portfolio. It’s one we are “Bullish” on.
The stock is in excellent shape to beat the broader market by at least two times over the next 12 months.
First, I’ll show you the uptrend in semiconductor sales that will push this company even higher.
Semiconductor Shortage = Massive Production on Horizon
As you can see in the chart below, demand for semiconductors isn’t going away.
Over the next year, consumer demand for products that use semiconductors is growing:
- 5G smartphones: 468% demand increase from 2019.
- Electric vehicles: 50% demand increase from 2019.
- Personal computers: 6% demand increase from 2019.
This means chip vendors face increasing pressure to produce and sell even more product.
The good news is this means stronger profits for chip manufacturers … and for those who invest now in this trend.
Under-the-Radar Chip Manufacturer: MPWR Semiconductor Stock
The big names in semiconductor manufacturing continue to struggle to meet the demand of companies including Ford and Dell Technologies Inc. (NYSE: DELL). So, they turn to Monolithic Power Systems Inc. (Nasdaq: MPWR) to produce the chips they need.
Monolithic is based in Kirkland, Washington. It designs and develops power semiconductors for computing, storage, automotive and communications applications. It creates integrated circuits used to provide the light source for LCD panels in notebook computers, car navigation systems and televisions.
That is, it produces what large companies need to get their products out the door.
As you can see in the chart above, Monolithic reported top-line revenue of $844.5 million in 2020.
The shortage in semiconductor chips due to the COVID-19 pandemic will benefit to the company’s bottom line.
By 2023, Monolithic should grow its total revenue by 86% to $1.57 billion.
In the 12 months ending in June 30, 2020, the company surpassed $1 billion in total revenue.
MPWR Semiconductor Stock
Two months ago, MPWR stock traded for $302 per share. Since then, it’s climbed to a new 52-week high of $458 per share — a 51% increase.
MPWR Semiconductor Stock Reaches New High
Using Adam’s six-factor Green Zone Ratings system, Monolithic Power scores a 70 out of 100 overall. That means we are “Bullish” on the stock and expect it to beat the broader market by two times in the next 12 months.
Monolithic rates in the green in:
- Quality — The company has double-digit returns on assets, equity and investment as well as a 57% gross margin — all above the semiconductor manufacturing industry averages. It scores a perfect 100 on this metric.
- Growth — MPWR has a one-year annual sales growth rate of 34% and a one-year earnings-per-share growth rate of 47%. Its annual dividend growth rate is 27%. The company earns a 99 on this metric.
- Momentum — The stock has been in a strong, confirmed uptrend for the last two months. It earns an 80 on this metric.
MPWR earns a 55 on volatility — right in the middle of all other stocks rated. That’s because, prior to this uptrend, the stock fluctuated.
The stock rates a 21 on size with a $21 billion market cap and a 5 on value as its price-to-sales, -book and -earnings are all higher than the industry average.
Bottom line: The shortage in semiconductor chips forces large companies to look at other chip providers to meet demand.
That demand is growing, even without production backlogs suffered due to the COVID-19 pandemic.
Monolithic Power supplies the essential semiconductors used by vehicle, smartphone and computer manufacturers.
MPWR is a strong semiconductor stock to add to your portfolio.
Matt Clark, CMSA®
Research Analyst, Money & Markets
Matt Clark is the research analyst for Money & Markets. He is a certified Capital Markets & Securities Analyst with the Corporate Finance Institute and a contributor to Seeking Alpha. Prior to joining Money & Markets, he was a journalist/editor for 25 years, covering college sports, business and politics.