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Why Microchip Is a Better Semiconductor Stock than Monolithic
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Modernity has given us many wonderful things. In fact, some things that were pretty much sci-fi in my growing-up years have transformed into “technology” today. One of the things that made this possible was advances in computational sciences that imparted intelligence to inanimate objects.
As IoT, wearables, cloud, self-driving cars and such other things get increasingly bandied about by technology experts of every hue, it is apparent that we are standing on the cusp of an entirely new paradigm. Yes, this is where we accept the fact that together we are better. And that togetherness is possible only when all these intelligent pieces are somehow connected to draw from each other, support each other and thereby reach the full potential of what each can be.
The intelligence comes from semiconductor devices, whether they’re in your computer, or smartphone or health tracking wrist band, or smart thermometer, or the cloud, or the networks facilitating “conversations” between them.
There are several aspects to this intelligence, i.e., the ability to perceive natural phenomena, compare it with other such phenomena previously experienced that is stored in the memory, checking the results of such experience, determining the probability that such experience will recur given the circumstances and deciding resultant activity.
But whatever the natural phenomena (heat, light, sound, etc.) being processed, we have to remember that machines don’t speak our language. So there has to be some mechanism that can read these things and transform them into signals that machines can in fact read. Thus we come to analog and mixed-signal processors that read raw data, change into digital form that machines process and then change the results back again into analog signals that we can read.
So it’s easy to see that the growing electrification of things and their growing interconnectedness would increase the demand for analog and mixed signal processing. Moreover, their attractiveness to the end customer is greatly reduced when they guzzle power, so all this processing has to be done in a highly energy efficient manner.
The cost of processing also increases when discrete devices are used, so there is the need for a higher level of integration. The constraints increase the challenges of designing these chips but also create opportunities for differentiation and therefore, pricing power. Since they can be manufactured more effectively at higher process nodes, they are also cheaper to make. All this makes for better margins.
Given this backdrop, both Microchip Technology (MCHP - Free Report) and Monolithic Power (MPWR - Free Report) look attractive because both are players in the Analog & Mixed Signal Semiconductor industry, which is ranked 51 out of the 265 industries in our coverage (top 19%). The broader Computer & Technology sector of which they are a part, is also positively placed at number 4 out of a total 16 sectors we cover (top 25%).
But not all stocks are made the same, which is why we could profit from a closer look:
Microchip Technology makes microcontrollers (computer-on-a-chip), which are systems combining processor, memory and peripherals to get specific jobs done. While currently embedded in a broad range of systems including automobiles, remote controls, home appliances, handhelds, security systems, motor controls, thermostats, computer peripherals etc, they are expected to be a major beneficiary of the IoT revolution because of the way they integrate different functionalities at low cost.
Microchip also makes over 3K analog, interface, mixed signal and timing products used by its customers in a wide variety of embedded control applications.
The company markets its products to the consumer, automotive, office automation, communications and industrial markets in Asia, Europe and the Americas. It has recently had some important auto wins.
This Zacks Rank #1 company (you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here) has a four-quarter average surprise of 9.5% and reported particularly strong results in the last-reported quarter. It also raised its guidance for the next quarter. Estimates for the Dec 2016 and March 2017 quarters are up 8.0% and 6.4%, respectively over the last 60 days. For 2017 and 2018, they are up a respective 7.8% and 6.8%.
Its expected average growth of 12.5% in the next five years is also significantly higher than growth of 7.8% in the last 5 years. The P/E of 20.07 trails the industry average of 25.40. The share price is up 24.2% in the last six months compared to 29.3% for the industry.
Monolithic Power Systems, Inc. provides small, highly energy efficient, easy-to-use power solutions for systems found in industrial applications, telecom infrastructures, cloud computing, automotive, and consumer applications. MPS' mission is to reduce total energy consumption in systems and by offering greener, more practical and more compact solutions.
The share price is up 22.7% in the last six months compared to 29.3% for the industry.
This Zacks Rank #2 company has missed estimates in three of the last four quarters averaging a negative surprise of 3.03%. But that doesn’t mean it’s done badly: the company is on track to grow earnings 42.50% in 2016, which compares favorably with the 31.10% growth expected of the industry. 2017 is expected to be another strong year (projected EPS growth is currently 28.21%). While the Zacks Consensus Estimate for 2016 hasn’t moved in the last 60 days, it is up 2.8% for 2017.
In Conclusion
While both stocks are part of an exciting and happening industry, it’s clear that MCHP has a better surprise history, which means it is more predictable. It is also a better buy because MPWR looks a bit overvalued at these levels.
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Why Microchip Is a Better Semiconductor Stock than Monolithic
Modernity has given us many wonderful things. In fact, some things that were pretty much sci-fi in my growing-up years have transformed into “technology” today. One of the things that made this possible was advances in computational sciences that imparted intelligence to inanimate objects.
As IoT, wearables, cloud, self-driving cars and such other things get increasingly bandied about by technology experts of every hue, it is apparent that we are standing on the cusp of an entirely new paradigm. Yes, this is where we accept the fact that together we are better. And that togetherness is possible only when all these intelligent pieces are somehow connected to draw from each other, support each other and thereby reach the full potential of what each can be.
The intelligence comes from semiconductor devices, whether they’re in your computer, or smartphone or health tracking wrist band, or smart thermometer, or the cloud, or the networks facilitating “conversations” between them.
There are several aspects to this intelligence, i.e., the ability to perceive natural phenomena, compare it with other such phenomena previously experienced that is stored in the memory, checking the results of such experience, determining the probability that such experience will recur given the circumstances and deciding resultant activity.
But whatever the natural phenomena (heat, light, sound, etc.) being processed, we have to remember that machines don’t speak our language. So there has to be some mechanism that can read these things and transform them into signals that machines can in fact read. Thus we come to analog and mixed-signal processors that read raw data, change into digital form that machines process and then change the results back again into analog signals that we can read.
So it’s easy to see that the growing electrification of things and their growing interconnectedness would increase the demand for analog and mixed signal processing. Moreover, their attractiveness to the end customer is greatly reduced when they guzzle power, so all this processing has to be done in a highly energy efficient manner.
The cost of processing also increases when discrete devices are used, so there is the need for a higher level of integration. The constraints increase the challenges of designing these chips but also create opportunities for differentiation and therefore, pricing power. Since they can be manufactured more effectively at higher process nodes, they are also cheaper to make. All this makes for better margins.
Given this backdrop, both Microchip Technology (MCHP - Free Report) and Monolithic Power (MPWR - Free Report) look attractive because both are players in the Analog & Mixed Signal Semiconductor industry, which is ranked 51 out of the 265 industries in our coverage (top 19%). The broader Computer & Technology sector of which they are a part, is also positively placed at number 4 out of a total 16 sectors we cover (top 25%).
But not all stocks are made the same, which is why we could profit from a closer look:
Microchip Technology (MCHP - Free Report)
Microchip Technology makes microcontrollers (computer-on-a-chip), which are systems combining processor, memory and peripherals to get specific jobs done. While currently embedded in a broad range of systems including automobiles, remote controls, home appliances, handhelds, security systems, motor controls, thermostats, computer peripherals etc, they are expected to be a major beneficiary of the IoT revolution because of the way they integrate different functionalities at low cost.
Microchip also makes over 3K analog, interface, mixed signal and timing products used by its customers in a wide variety of embedded control applications.
The company markets its products to the consumer, automotive, office automation, communications and industrial markets in Asia, Europe and the Americas. It has recently had some important auto wins.
This Zacks Rank #1 company (you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here) has a four-quarter average surprise of 9.5% and reported particularly strong results in the last-reported quarter. It also raised its guidance for the next quarter. Estimates for the Dec 2016 and March 2017 quarters are up 8.0% and 6.4%, respectively over the last 60 days. For 2017 and 2018, they are up a respective 7.8% and 6.8%.
Its expected average growth of 12.5% in the next five years is also significantly higher than growth of 7.8% in the last 5 years. The P/E of 20.07 trails the industry average of 25.40. The share price is up 24.2% in the last six months compared to 29.3% for the industry.
Monolithic Power (MPWR - Free Report)
Monolithic Power Systems, Inc. provides small, highly energy efficient, easy-to-use power solutions for systems found in industrial applications, telecom infrastructures, cloud computing, automotive, and consumer applications. MPS' mission is to reduce total energy consumption in systems and by offering greener, more practical and more compact solutions.
The share price is up 22.7% in the last six months compared to 29.3% for the industry.
This Zacks Rank #2 company has missed estimates in three of the last four quarters averaging a negative surprise of 3.03%. But that doesn’t mean it’s done badly: the company is on track to grow earnings 42.50% in 2016, which compares favorably with the 31.10% growth expected of the industry. 2017 is expected to be another strong year (projected EPS growth is currently 28.21%). While the Zacks Consensus Estimate for 2016 hasn’t moved in the last 60 days, it is up 2.8% for 2017.
In Conclusion
While both stocks are part of an exciting and happening industry, it’s clear that MCHP has a better surprise history, which means it is more predictable. It is also a better buy because MPWR looks a bit overvalued at these levels.
Where Do Zacks' Investment Ideas Come From?
You are welcome to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buy" stocks free of charge. There is no better place to start your own stock search. Plus you can access the full list of must-avoid Zacks Rank #5 "Strong Sells" and other private research. See the stocks free >>