3 Reasons POWI is Risky and 1 Stock to Buy Instead

Shareholders of Power Integrations would probably like to forget the past six months even happened. The stock dropped 25.1% and now trades at $43.76. This might have investors contemplating their next move.

Is there a buying opportunity in Power Integrations, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Power Integrations Will Underperform?

Even though the stock has become cheaper, we're cautious about Power Integrations. Here are three reasons why POWI doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Flatter Than a Pancake

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Power Integrations struggled to consistently increase demand as its $442.5 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.

Looking at the trend in its profitability, Power Integrations’s operating margin decreased by 15.7 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 4.7%.

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 2.1% annually over the last five years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences.If the tide turns unexpectedly, Power Integrations’s low margin of safety could leave its stock price susceptible to large downswings.

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 24.7× forward P/E (or $43.76 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of our top digital advertising picks.

Stocks We Would Buy Instead of Power Integrations

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