POWER INTEGRATIONS INC (POWI) stock intrinsic value fair value estimate & owner earnings analysis

Power Integrations designs high-voltage chips that convert mains AC power into the DC power used inside phone and laptop chargers, household appliances, LED lighting, industrial motor drives, renewable-energy inverters and electric-vehicle systems. Its best-known families are InnoSwitch, LinkSwitch and TOPSwitch, plus the SCALE gate drivers used in high-power industrial equipment. It is largely fabless, has no borrowings, and sells about 69% of its output through distributors. About 98% of sales are billed outside the United States and about 55% to customers in Hong Kong and mainland China, because that is where most power supplies are assembled. It defends a large patent estate in court, most visibly in October 2019, when ON Semiconductor paid it $175 million in cash to settle every outstanding dispute. How we measure earnings. We count owner earnings as the cash the business generates from operations, with temporary swings in inventory, receivables and payables taken out, less the cost of stock handed to employees, less the capital spending needed to stand still. Capital spending that only supports revenue growth is excluded. On that basis owner earnings from 2016 to 2025 were roughly $64M, $40M, $66M, $198M, $33M, $157M, $172M, $62M, $40M and $27M. We exclude 2019 because it contains the one-time ON settlement. 2020 is understated because it includes the purchase of a design-centre building in Germany, which we left as an ordinary cost. 2021-22 were a boom of chip shortages and channel stocking. 2023-25 were the destocking that followed it. The median across this full cycle, excluding 2019, is about $62M, or $1.08 a share. These figures replace our earlier series, which did not strip out working-capital swings, so the previous figures are not comparable. Why we normalize below that median. Two changes visible in the filings mean the mid-cycle years overstate today's business. First, the cost of employee stock compensation has roughly doubled, from about $21M a year in 2016-18 to about $40M in 2025, which takes about $15-18M a year off owner earnings at any given level of sales. Second, the company told shareholders that its 2024 sales decline came from Chinese smartphone makers switching to Chinese-made charger chips. Communications fell from 29% of sales in 2023 to 12% in 2024 and 2025, and that business has not come back. Adjusting the cycle median for those two facts gives normal owner earnings of about $45M a year in today's conditions. The business has no debt and paid no interest, so its owner earnings are also the cash it generates before lenders. Near-term path. Owner earnings fell 33% in 2025, to $26.6M from $39.5M. The fall came mostly because operating cash flow in 2025 was flattered by a $22M release of working capital, which we strip out, and because stock compensation rose. For 2026 the base case assumes about $27M, essentially flat rather than a further decline. Two dated facts support that. In February 2026 the company cut about 7% of its global workforce, at a one-time cost of $3.5-4.0M. First-half 2026 results then showed revenue up 2.6% to $227.2M, stock compensation down to $17.6M from $18.8M, and net income up to $13.1M from $10.2M. The case then steps back to the $45M normal level by 2029. That is a return to earnings the business has already produced, not new growth. We credit no growth beyond it. The company's rising industrial share (38% of 2025 sales, led by gate drivers) and its newer high-voltage gallium-nitride products are real, but neither is contracted or proven over a full cycle, so they are left out. Base case. Owner earnings of $27M, $33M and $39M in 2026-28, then $45M a year through about 2045. That span rests on the company's record of launching a new chip family every few years, funded from its own cash, since the 1990s, and on the patent estate it has shown it will enforce. After that we fade earnings to zero over ten years, because the Chinese substitution already seen in phone chargers is evidence that this moat erodes. The business is worth about $540M. It owes nothing and holds $262.6M of cash and short-term securities at June 30, 2026. Holding back about $50M as working cash leaves about $213M of surplus, for roughly $752M of equity, or $13.35 a share. Bear case. Analog power chips sold through distributors go through hard inventory cycles, and this company's own record shows how deep they go. Owner earnings fell from $172M in 2022 to $62M, $40M and $27M over the following three years, as revenue fell 32% from 2022 to 2024. The bear case assumes another downturn of that kind starting in 2027. Owner earnings start at $25M in 2026, sink to about $10M in each of 2027 and 2028, and recover only to $20M and then $25M. They hold there through 2035 and then fade to zero over the following decade, as Chinese suppliers repeat in consumer and industrial markets what they did in phone chargers. The business is worth about $210M. With no debt and the same $213M of surplus cash, equity is about $422M, or $7.50 a share. In that case the current dividend of about $47M a year would exceed owner earnings for several years and would have to be paid from the cash pile or cut. Bull case. Industrial and gate-driver sales keep gaining share, the 2026 cost cuts hold, and owner earnings reach $60M by 2029. That is roughly the level of 2016 and 2018 after allowing for today's higher stock compensation, and still far below the 2021-22 boom. Earnings stay there through about 2050 and then fade over ten years. The business is worth about $772M, plus $213M of surplus cash, for about $985M of equity, or $17.48 a share. How sure we are, and the margin-of-safety price. We are confident about the balance sheet: no debt, an undrawn $75M credit line, and about $4.66 a share of cash and securities, of which about $3.77 is beyond what the business needs to operate. We are much less sure of the earnings level. Owner earnings have ranged from $27M to $172M in five years, and they are now at the bottom of that range. The worst plausible outcome is that Chinese power-chip makers do to appliances and industrial supplies what they did to phone chargers, leaving owner earnings near zero for years. Because the company carries no debt and no customer takes more than about 11-18% of sales, it would survive. The shares would then be worth little more than the cash, around $4-5. If our normal earnings level is too high, say $30M rather than $45M, the shares are worth roughly $9-10. In the meantime, the company pays about $0.84 a share in dividends, but owner earnings currently cover only about half of that, so we do not count on the dividend through a downturn. The margin-of-safety price is $7.00. At that price the cash alone covers more than half the price. A return to normal earnings over three or four years, plus the dividend for as long as it lasts, implies about a 20% annual return. In a repeat of the 2023-25 slump the shares would be worth about the margin-of-safety price.