Deutsche Bank: Buy This Nvidia Supplier Despite 30% Drop

The stock of Monolithic Power Systems Inc. (MPWR) has experienced a significant 33% drop since its high on October 29, when it was trading at around $933, down to a close of $625.82 on Friday. The sharp decline came after the company released its third-quarter earnings. While the results exceeded expectations, the forecast for fourth-quarter revenue — ranging between $600 million and $620 million — fell slightly short of analysts’ consensus estimate of $602.7 million. This led to a double-digit drop in the stock on the same day. Further pressure came in November with reports suggesting Nvidia (NVDA), a key customer, might reduce purchases of Monolithic’s components for its upcoming Blackwell platform, which had previously been seen as a growth catalyst for MPWR.

Despite these setbacks, Deutsche Bank (DB) has recently highlighted MPWR as a “top pick,” viewing the current dip as a buying opportunity. They maintain a “buy” rating with an ambitious $900 price target, underpinned by expectations of revenue growth and margin improvements over the next two years. Their confidence stems from Monolithic’s consistent performance, its ability to grow above industry averages, and a broad array of growth drivers, particularly in the expanding AI market.

The firm’s valuation, while at the higher end of what analysts might consider comfortable, is justified, according to Deutsche Bank, by Monolithic’s solid operational execution and potential for sustainable margin expansion. This optimism, as noted by IP, is echoed by the broader analyst community, where ten out of eleven analysts tracked by Visible Alpha rate MPWR as a ‘Buy,’ with one rating it a ‘Hold.’ The average price target among these analysts stands at $822.91, indicating a belief that the stock could recover much of its recent losses, potentially offering over 31% upside from its current trading levels.

Monolithic Power Systems’ involvement in the AI sector is particularly noteworthy. Even with potential reductions from Nvidia, the company is positioned to benefit from a wider market demand for AI-related semiconductors. This diversity in its customer base and application areas could mitigate the impact of losing share with one supplier, providing a buffer against market volatility in specific sectors.

As Monolithic gears up to announce its fourth-quarter earnings on February 6, investors and analysts alike will be watching closely. The report could serve as a pivotal moment, either confirming the recent pessimism or validating the bullish outlook held by many analysts. The outcome of this earnings release will likely influence whether the stock can regain investor confidence and start to climb back towards its previous highs, or if it will continue to reflect the caution following its recent performance and market speculations.

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