What a fantastic six months it’s been for Power Integrations. Shares of the company have skyrocketed 63.4%, hitting $67.83. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Power Integrations, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Power Integrations Will Underperform?
We’re happy investors have made money, but we’re swiping left on Power Integrations for now. Here are three reasons you should be careful with POWI, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Power Integrations’s demand was weak over the last five years as its sales fell at a 4.2% annual rate. This was below our standards and signals it’s a low quality business. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Analyzing the trend in its profitability, Power Integrations’s operating margin decreased by 25 percentage points over the last five years. Power Integrations’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 1.1%.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Power Integrations, its EPS declined by 10.7% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
Power Integrations falls short of our quality standards. Following the recent surge, the stock trades at 45.4× forward P/E (or $67.83 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.
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