MIPS AB - Up 87%, Q2'24 review, the recovery is here
MIPS AB - Up 87%, Q2'24 review, the recovery is here
Nearing a bagger after 10 months, dodged the decline and catching the up cycle. Update on market share.
Hi, I am Trung. I deep-dive into market leaders. I follow up on their performance with my Thesis Tracker updates, and when the right price comes, I buy them for the Sleep Well Portfolio, which I am building for my daughters to redeem in 2037. I disclose my reasoning for all BUY and SELL (ideally never) transactions (1st, 2nd, 3rd, 4th). Access all content here.
Wow, what a recovery! MIPS reported its best quarter since Q2 2022.
MIPS stock has risen 87% since my buy alert (SEK 550 from SEK 300).
Sometimes luck is more important than skill, such as my recent trim of CrowdStrike at the peak of $381/share before the IT outage and Pax Global after meeting the management last year. It looks like luck is on my side again with MIPS.
But MIPS’s stock rally isn’t a huge surprise if you have been reading my last five earnings reviews Q1’24, Q4’23, Q3’23, Q2’23, and Q1’23).
Having tracked Thule and Shimano for the last five quarters, I was comfortable pitching that MIPS’s bloated inventory was ending.
I deep-dived into MIPS in April 2023 and did not buy the stock until October 2023, when I saw that the recovery was within reach.
I think a similar setup is boiling for Fortinet (65% of its revenue is on the cusp of recovery), Floor and Decor (the housing market looks to be turning as interest rate cuts are on the horizon), and Sea Limited (its gaming division has returned to growth and e-commerce and fintech are starting to generate free cash flow).
To be clear, I am not trying to fish the bottom or be a momentum trader. I am merely trying to look for enduring businesses; occasionally, they go through tough times, which isn’t a reason to shy away from them.
On the contrary, that’s a great time to dive deeper into how they cope and make changes. Being a leader or having a great history means little if they can’t adapt or improve in the face of adversaries. CrowdStrike is in the midst of it, and premium readers know I am watching it closely.
As things progress, I will determine if CrowdStrike is an enduring enterprise. I also acknowledge that luck can’t always be on my side. So, I am taking a basket approach. In particular, I am hedging my position by owning a more significant position in Fortinet and adding to CrowdStrike when the world projects the worst for the company. Invert, as wiser men in the business say. It has worked wonders for MIPS, CrowdStrike, and Pax Global.
Now, let’s read what the recovery looks like for MIPS.
Q2’24 result - The recovery is here
Q2’24 results show how scalable and differentiated MIPS is from peers. I am impressed with the business's resiliency over the downturn (post-COVID) and operating leverage in the upturn, which I believe has started and is well-documented in my analysis of Q1’24 and Q4’23.
I applaud the management, who have been adamant that MIPS will return to growth, albeit slightly longer than expected, but more impressive than peers which we will see in the market share section.
Resilient and Scalability
Sales grew +31% to SEK 133m (102), a massive turnaround from recording seven consecutive quarters of decline to as low as -51% (highlighted above).
This is mainly because both the market and inventory situations have improved—sales from all regions and helmet types have returned to growth for the first time since early 2022.
Still, growth was also attributed to MIPS technology's brand relevance and stickiness—MIPS's top helmet ranking, embedded helmet design and assembly processes, store designs, etc. Brands continued to adopt MIPS in many new helmet models, which management said were winning new contracts reported from the last two quarters.
It's the customers buying from us, we are stealing market share, and we are increasing the penetration. — Max Strandwitz, Q2’24
We also see when inventory is being replenished, especially on the European market, that a lot of the new orders from customers is with Mips, because Mips is stealing a lot of market share. And when you now buy new inventory, of course, we see that there is an over-representation of Mips versus before. — Max Strandwitz, Q2’24
This is a sign of a resilient business. Below, you’ll see how scalable it is. Marketing and R&D account for only 7% and 5% of total sales. As sales improve, the improvement magnifies the profit and cash flow lines.
Operating profit increased by 125% to SEK 52m (23).
Operating margin increased by 16.3 percentage points to 38.9% (22.6).
Cash flow from operating activities increased by 224% to SEK 29m (9).
Earnings per share, diluted, increased by 101% and amounted to SEK 1.53 (0.76).
Notably, the operating margin has returned to levels not seen in Q2’22, when things were still very rosy before the inventory drawdown.
Market share
Last year, MIPS was equipped in 18 of 22 Tour de France teams and had 91 top-ranking helmets out of 100; both stats are a good proxy for MIPS's market share. Let’s see how MIPS performs this year.