Power Integrations (NASDAQ:POWI) designs and manufactures ICs (integrated circuits) for the power supply market. The company's stock is richly valued compared to its competitors. In the last ten years the company's revenue has grown at a CAGR of 6.36% and EBITDA has grown at a CAGR of 5.31%. I believe revenue and EBITDA will continue to grow at similar pace in the next five years. Long-term investors can buy the stock during pullbacks to maximize their gain.
Power Integrations develops and markets analog and mixed-signal ICs. It also develops related electronic components and circuitry used in high-voltage power conversion. Most of its products are ICs used in AC-DC power supplies. These products convert high-voltage AC from a wall outlet to low-voltage DC required by most electronic devices. Through its research and development initiative, the company seeks to introduce more advanced products for its markets compared to current products.
Power Integrations offers gate drivers, electrical isolation components and related circuitry. These are used to operate high-voltage switches like IGBTs and silicon-carbide MOSFETs. These types of special combinations of switches and drivers are used for power conversion in high-power applications, such as solar- and wind-power systems, industrial motors, electric vehicles and hybrid electric vehicles. Compared to less advanced alternatives, Power Integrations' products offer several benefits to its customers. These include simple design of products, reduced component counts, smaller size and reduced time-to-market. According to a report, "The overall power supply market is expected to grow from USD 25.00 billion in 2017 to USD 34.92 billion by 2023, at a CAGR of 6.7% from 2018 to 2023." This is good news for Power Integrations, as it is mainly a player in the power supply market.
The company's high-voltage gate drivers come in the form of standalone ICs or circuit boards containing ICs. A gate driver is actually a power amplifier which accepts a low-power input from a controller IC. It then amplifies the low-power input to high-power drive input for the gate of a high-power transistor, such as an IGBT or power MOSFET. Gate drivers are used in power supply circuits and motor drives. According to a report, "Global gate driver IC market size was valued at $1,260.5 million in 2017, and is projected to reach $2,040.4 million by 2025, growing at a CAGR of 6.3% from 2018 to 2025." Power Integrations' gate driver revenue will also increase at a similar rate.
Power Integrations' net revenues for the third quarter of 2019 came in at $114.2 million, up 11% from the previous quarter and up 4% from the third quarter of 2018. The company's net income came in at $17.1 million or $0.57 per diluted share, compared to $0.37 per share in the previous quarter and $0.59 per share in the third quarter of 2018. The company delivered good results amid weak geopolitical and macroeconomic backdrop.
The company's fast chargers for smartphones witnessed accelerated adoption in the third quarter and remained its key growth driver in the quarter. As a result, its communications revenue grew nearly 40% YoY in the third quarter. Its InnoSwitch ICs including its new higher-power devices with GaN switches and its FluxLink isolation technology also witnessed accelerated adoption in the third quarter. The company said that it has more such technologies in its pipeline. These technologies will help the company grow its revenue in the long term.
Analog and mixed-signal IC markets are highly competitive. Power Integrations competes with ON Semiconductor (ON), STMicroelectronics (STM), Infineon Technologies (OTCQX:IFNNY), NXP Semiconductors (NXPI), Diodes Incorporated (DIOD) and Dialog Semiconductor (OTCPK:DLGNF).
Power Integrations' most significant competitive advantage is that its products are highly integrated. As a result, these products enable designs of power converters with fewer total components compared to competitors' products. Power converters having fewer total components can be developed more quickly and more efficiently. In addition, the products of Power Integrations have superior safety features and energy-efficiency features, which are its additional competitive advantages.
Power Integrations' competitors include ON Semiconductor, STMicroelectronics, Infineon Technologies, NXP Semiconductors and Diodes Incorporated. Power Integrations' non-GAAP forward P/E multiple is 35.72x, compared to ON Semiconductor's 14.67x, STMicroelectronics' 23.45x, Infineon Technologies' 24.17x, NXP Semiconductors' 15.51x and Diodes Incorporated's 15.86x. Power Integrations' trailing 12-month price to sales ratio is 6.61x, compared to ON Semiconductor's 1.60x, STMicroelectronics' 2.43x, Infineon Technologies' 2.92x, NXP Semiconductors' 3.74x and Diodes Incorporated's 1.89x. Power Integrations' trailing 12-month price to cash flow ratio is 43.83x, compared to ON Semiconductor's 8.76x, STMicroelectronics' 13.01x, Infineon Technologies' 15.67x, NXP Semiconductors' 14.39x and Diodes Incorporated's 10.06x.
Power Integrations is richly valued compared to its competitors. Power Integrations' revenue has grown at a CAGR of 6.36% in the last ten years, and its EBITDA has grown at a CAGR of 5.31% at the same time. Its total cash on balance sheet is $244.81 million and total debt is $9.21 million. It is a cash-rich company. The reason why Power Integrations is richly valued is that it is a niche player in the power supply market. It designs and manufactures highly integrated ICs for power converters, which are top quality products. In addition, it offers high-voltage gate drivers, which are specialized products in power electronics applications. It has a strong pipeline of more such products, which will ensure revenue growth in the forthcoming quarters. Clearly, market is factoring in future growth at the current price.
I believe in the next five years Power Integrations' revenue will grow at a CAGR of 6.36%, the rate at which its revenue has grown in the last ten years. The company's trailing 12-month revenue is $399.5 million. At a CAGR of 6.36%, its 2024 revenue will be $543.8 million, or $18.48 per share. In the last one year the company's shares have traded in the price to sales ratio of 4x and 7x. Applying a price to sales ratio of 7x on the company's 2024 revenue per share, I get $129.36 as its 2024 share price.
Power Integrations' effort to develop new ICs or other related products for the high-voltage power conversion market is a crucial factor for its success. Developing new ICs or other products is a complex task, which may lead to delays and defects. Product defects result in repairing or recalling of the product. If the company fails to develop new products in a timely manner, its revenue growth could be negatively impacted.
If Power Integrations fails to penetrate new markets for its products, its revenue growth could be adversely affected. Penetrating new markets is not an easy task and it requires tremendous marketing and technological expertise. Power Integrations is a niche player in the power supply market, and for it continuing to penetrate new markets is more difficult.
Power Integrations' products are used in a limited number of applications, which includes cellphone chargers, desktop PCs, LED lights and consumer appliances. The company expects that in the near term a significant portion of its revenue will continue to be dependent on these applications. If the end markets that the company serves witness any cyclicality or economic slowdown, the demand for the company's ICs will fall. As a result, its revenue growth could be negatively impacted.
Power Integrations develops ICs for the power supply market, which is highly competitive. However, being a niche player in this market, Power Integrations can compete with larger players with its highly specialized ICs. The company's stock is expensive around the current price. Long-term growth-oriented investors can buy the stock on significant pullbacks.
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