Over the past six months, Power Integrations’s shares (currently trading at $52.58) have posted a disappointing 14% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is now the time to buy Power Integrations, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Power Integrations Will Underperform?
Even with the cheaper entry price, we're swiping left on Power Integrations for now. Here are three reasons why we avoid POWI and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Power Integrations struggled to consistently increase demand as its $432.8 million of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of poor business quality. 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 an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Analyzing the trend in its profitability, Power Integrations’s operating margin decreased by 11.7 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 5.6%.
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 2.4% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
Final Judgment
We cheer for all companies solving complex technology issues, but in the case of Power Integrations, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 30.6× forward P/E (or $52.58 per share). This valuation tells us a lot of optimism is priced in - you can find better investment opportunities elsewhere. We’d suggest looking at one of our top digital advertising picks.
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