We recently compiled a list of the 10 Most Profitable NASDAQ Stocks To Invest In. In this article, we are going to take a look at where Monolithic Power Systems Inc. (NASDAQ:MPWR) stands against the other profitable NASDAQ stocks.

Is the Market Sentiment Still Bullish?

Recent analysis indicates that an anticipated tech rally may be delayed until year-end, despite the S&P 500 achieving a remarkable 20% increase year-to-date. As September closed, the index rose by 1.6%, defying its historical volatility and showcasing market resilience. Positive macroeconomic indicators are emerging, with upward revisions to Q3 growth estimates and low jobless claims, suggesting a stable economic foundation.

However, concerns about sustaining market momentum without new catalysts persist. Historically, stock prices and price-to-earnings multiples rise together unless disrupted by negative events. As the market approaches traditionally strong months following elections, expectations for a potential year-end rally are building. Despite elevated volatility and geopolitical tensions, investor caution remains. The NASDAQ 100 has surged significantly over the past two years, but this performance does not yet indicate speculative excess. In the last days of September, DataTrek Research co-founder, Nick Colas, joined CNBC to discuss the trading day and highlighted his outlook on the NASDAQ during the conversation. We covered his views in our article on the 10 Best Performing NASDAQ Stocks in 2024. Here’s an excerpt from it:

“…Over the past two years, the NASDAQ 100 has surged approximately 67%, marking a significant recovery since its lows in October two years ago. This performance is substantially above the historical average return of around 25%. Colas emphasized that while such returns are impressive, they do not yet indicate speculative excess; historically, a doubling of the NASDAQ over two years would signal potential trouble for investors.

Looking back further, Colas noted that since peaking before the bear market in November 2021, the NASDAQ 100 has only risen about 20% over three years. This suggests that there may still be room for growth compared to prior bubbles when returns were much more pronounced within shorter time frames.”

In a recent discussion on October 9,  Jason Snipe, Odyssey Capital Advisors principal, joined CNBC’s ‘Closing Bell’ to discuss the tech sector’s mega-cap momentum, particularly in light of recent mega-cap stock downgrades and significant investor outflows. Despite these challenges, Jason Snipe noted that the tech sector is having a positive day, attributing this to a combination of improved earnings estimates across various sectors and substantial investments in AI-related capital expenditures. He emphasized that ~40% of operating cash flow is being allocated to AI, raising questions about when these investments will start to yield returns. This focus on AI has contributed to some recent downgrades but also suggests continued upside potential for select names within the sector.

Snipe further defended the tech space by highlighting the profit margins of mega-cap stocks, which average over 23%, compared to just over 8.5% for other sectors. This discrepancy indicates a strong reason for ongoing capital inflows into tech and software companies that demonstrate earnings strength. He acknowledged that while there may be some consolidation and a slowdown in growth, he believes that investors’ muscle memory will eventually lead to a resurgence in these stocks.

When discussing NVIDIA’s recent performance, Snipe pointed to comments made by the CEO regarding the endless demand for their Blackwell chip as a significant catalyst for the stock’s movement. He expressed confidence that it would exceed earnings expectations when they report later in the earnings season. However, Snipe also addressed concerns regarding Amazon, which has seen its stock decline for 8 of the last 9 days. He noted that its retail business appears to be struggling, with retail making up 62% of its operations. Despite this, he highlighted AWS as a bright spot, which reported a 19% year-over-year acceleration. He suggested that competition from other retailers could pressure its retail margins but remained optimistic about the company’s diverse revenue streams, including advertising and subscription services.

Snipe’s analysis underscores the complexities facing the tech sector amid market volatility and evolving economic conditions. While challenges persist, particularly with mega-cap stocks experiencing downgrades, there are also significant opportunities driven by innovation and strong profit margins that could support continued growth in this space. As expert sentiments shift regarding MAG7 and other big tech stocks, other profitable tech companies are maintaining their positive momentum in the market.

Methodology

We sifted through Finviz to compile an initial list of the top NASDAQ stocks. From that list, we narrowed our choices to 20 companies with positive TTM net income and 5-year net income compound annual growth rates. We then selected the 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Monolithic Power Systems Inc. (NASDAQ:MPWR)

TTM Net Income: $411.0 million

5-Year Net Income CAGR: 31.11%

Number of Hedge Fund Holders: 35  

Monolithic Power Systems Inc. (NASDAQ:MPWR) is a leading provider of high-performance, analog integrated circuits (ICs). Its products are used in a variety of applications, including power management, battery charging, and power delivery. It’s known for its innovative technology and high-quality products, which are essential components in various electronic devices.

Analog chips, essential components in electronic devices, are closely tied to economic growth. Unlike digital chip makers, analog chip producers often manufacture their own chips due to less complex production processes. Analog product cycles tend to be longer, spanning 5-7 years. Days Inventory Outstanding (DIO) is a crucial metric for chipmakers, reflecting supply and demand dynamics. A rising DIO can indicate weakening demand. While this company’s DIO has decreased recently, it remains above its 5-year average, suggesting higher inventory levels.

Over the past 3 years, this company has demonstrated strong revenue growth, averaging 24.2% annually. However, the recent quarter saw a slight slowdown, with revenue increasing from $441.1 million to $507.43 million, up 15.03%.  Despite the slowdown, the company made $3.17 per share in this period.

The growth was triggered by strong demand in the automotive and industrial sectors, driven by the shift to EVs. Enhanced production capacity, higher product offerings, strategic partnerships, and economic recovery further boosted sales. Still, given the cyclical nature of the semiconductor industry, long-term investors should anticipate fluctuations in revenue growth.

Monolithic Power Systems Inc. (NASDAQ:MPWR) appears to be well-positioned for continued growth and success. The company’s strong financial performance, positive market outlook, and focus on innovation suggest a promising future. Its stock is up by a considerable 12% over the past 3 months.

ClearBridge SMID Cap Growth Strategy stated the following regarding Monolithic Power Systems, Inc. (NASDAQ:MPWR) in its Q2 2024 investor letter:

“Another top individual contributor was Monolithic Power Systems, Inc. (NASDAQ:MPWR), in the IT sector, which makes semiconductor-based power electronics for the computing and storage, automotive, industrial, communications and consumer markets. Continued demand for AI-related companies and beneficiaries and anticipation of greater demand for data center components such as power management hardware for CPUs helped drive strong performance in the quarter. We believe Monolithic is one of the most attractive semiconductor plays within the SMID universe and that the company will continue to gain share in analog semiconductors as it wins design contracts.”

Overall MPWR ranks 9th on our list of the most profitable NASDAQ stocks to invest in. While we acknowledge the potential of MPWR as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MPWR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure: None. This article is originally published at Insider Monkey.