Power Integrations' (NASDAQ:POWI) Profit Understated by Conservative Accounting Practices

Power Integrations reported weak earnings, but our analysis suggests its income statement is of high quality. The company's accrual ratio of -0.11 indicates strong free cash flow, and its statutory profit may underestimate its earnings potential. However, earnings per share declined over the past year. Investors should consider the risks involved in analyzing the stock.

Power Integrations (POWI) reported its second-quarter (Q2) 2025 results on August 6, 2025, with mixed outcomes that highlight both growth opportunities and challenges. The company reported a 9.1% year-on-year (YoY) increase in revenue to $115.85 million, slightly above analyst expectations of $114.9 million [2]. However, the company's guidance for the third quarter was less impressive, with revenue expected to be $118 million, which was 7.7% below analyst estimates of $127.8 million [2].

The company's adjusted earnings per share (EPS) of $0.35 were in line with analyst expectations, while its adjusted EBITDA of $25.24 million missed estimates by 12.7% [2]. The company's operating margin declined to -1.2% from 1.8% in the previous quarter, reflecting the impact of tariffs and inventory adjustments, particularly in the appliance segment [2].

Power Integrations' management attributed the quarter's performance to growth in industrial and GaN-based products, offset by appliance segment volatility tied to tariffs and front-loaded demand [2]. The company's CEO, Jennifer Lloyd, highlighted continued growth in high-voltage GaN products and metering design wins, but also noted that the consumer appliance business is facing short-term pressure from tariffs and a sluggish housing market [2].

The company's income statement suggests strong free cash flow, with an accrual ratio of -0.11, indicating that its statutory profit may underestimate its earnings potential [1]. However, earnings per share (EPS) declined over the past year, which could be a concern for investors [1].

Investors should consider the risks involved in analyzing the stock, including tariff-related uncertainties and the potential for a multi-quarter adjustment in the appliance segment as inventories rebalance and tariff impacts play out [2].

Power Integrations expects near-term growth to be tempered by tariff-related uncertainties, offset by continued investment in advanced GaN and high-power applications. The company is increasing R&D efforts to accelerate the launch of next-generation GaN products for data centers and automotive, targeting higher-value, high-voltage applications [2].

In conclusion, Power Integrations reported mixed Q2 results, with growth in industrial and GaN-based products offset by appliance segment volatility. The company faces tariff-related uncertainties and a sluggish housing market, but remains optimistic about long-term growth opportunities in high-power systems. Investors should consider the risks involved in analyzing the stock, including tariff-related uncertainties and the potential for a multi-quarter adjustment in the appliance segment.

References:
[1] https://simplywall.st/stocks/us/semiconductors/nasdaq-powi/power-integrations/news/the-bull-case-for-power-integrations-powi-could-change-follo
[2] https://finance.yahoo.com/news/powi-q2-deep-dive-leadership-072025240.html