NEW YORK, Oct. 9, 2019 /PRNewswire/ -- Report entitled "Powering Down Fab-U-Less Earnings" outlines how Monolithic Power Systems, Inc faces 75-85% downside risk to approximately $21 to $35 per share. Spruce Point's forensic financial analysis and on-the-ground research in China have revealed large irreconcilable differences between MPWR's consolidated filings and its Chinese tax documents – including, most alarmingly, a discrepancy in China-domiciled revenue of $263m and no inventory. These concerns are compounded by MPWR's increasingly bloated inventory metrics, mirroring those of other semiconductor companies plagued by accounting scandals in the past, and the apparent deterioration of its relationship with Microsoft, a major undisclosed customer. Spruce Point's research finds that MPWR's poor governance has made it a highly unattractive M&A target, leaving current valuations – pinned in part to hopes of a possible takeout – far above appropriate levels.
Irreconcilable Revenue And Worrisome Inventory Bloat: MPWR, a company citing two material weaknesses immediately preceding its IPO, claimed $335m of its 2018 company-wide revenue (58% of total) to be domiciled in China. However, the tax filings of its three Chinese subsidiaries show revenue of only $73m and gross margins of 35.9% – materially below the 55.6% documented in its consolidated financial statements. Notably, these tax filings show almost no inventory domiciled in China at year end 2017-18 despite its China-centric production footprint and large number of Chinese customers. The magnitude of the disparity between these two sets of statements is highly unusual and suggests that at least one is likely to be inaccurate. MPWR inventory days have also ballooned to ~80% above the industry average – a red flag that has foreshadowed two accounting scandals in the semiconductor industry. We believe that these concerns should give investors significant pause as to the potential risks involved in owning MPWR shares.
- Large Undisclosed Customer Relationship Appears To Be On Shaky Terms: Our analysis suggests that 17% of MPWR's revenue is tied to Microsoft – a relationship which isn't explicitly disclosed in its financial statements, despite the potentially material risks it may pose to the company. Based on disparaging public comments made by CEO Hsing directed at the "gaming" industry, MPWR does not appear to respect the Microsoft relationship, and could stand to lose the business over time as Microsoft looks to diversify suppliers. Our analysis suggests that Microsoft has single-handily kept MPWR's consumer segment afloat in recent years, amplifying the risks facing MPWR as its relationship grows increasingly tenuous.
- A Culture Of Weak Financial Controls And A Suspicious Auditor Dismissal: Our interviews with company formers reveal that MPWR's CEO Hsing has little patience for financial and audit professionals. Both roles have seen meaningful turnover since the IPO, and the circumstances surrounding these exits (including the recent dismissal of its auditor of 20 years) should be cause for investor concern. We worry that poor financial oversight, combined with questionable capital allocation decisions – notably, expensive real estate purchases – could pose a serious threat to the financial health of the business.
- Poor Alignment With Shareholders And Unattractive Risk/Reward: As MPWR's stock has risen in recent years, MPWR's insiders have slashed their ownership from 37.5% at IPO to just 3% today (and CEO Hsing to just 1%). Analysts project that MPWR will generate 19% and 27% sales and EPS growth, respectively, in 2020, but we believe that MPWR's eroding technological edge and growing challenges in maintain margin and growth in China make such results unlikely, and that its Chinese tax filings throw into question its financial status as a whole. MPWR also trades at nosebleed valuations of 10x sales and 37x EBITDA – a substantial premium to semiconductor takeout multiples of at 3.3x sales and 17.5x EBITDA – despite in our opinion a reckless managerial culture which, per our conversations, would make it a poor fit with more conservative industry players. Based on our belief that MPWR's Chinese tax filings may be a credible indicator of potential financial misstatement, we see 75% - 85% downside to MPWR shares.
Spruce Point Capital has a short position in Monolithic Power Systems, Inc. (MPWR) and stands to benefit if its share price falls.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.
Spruce Point Capital Management
Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.
SOURCE Spruce Point Capital Management, LLC