Spruce Point: This Chip Stock Could Lose 85%

The bear note has brought plenty of MPWR options traders to the table today

Digital Content Manager
Oct 9, 2019 at 11:31 AM
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A scathing note from Spruce Point Capital Management this morning has sent the shares of Monolithic Power Systems, Inc. (NASDAQ:MPWR) falling down the charts. The short seller issued a "strong sell" rating and predicted 75% to 85% downside risk for the chip stock, citing "too many red flags to ignore," and said hopes for a takeover are "wildly optimistic." The security hit a three-month low of $131.13 earlier, and is now down 5% at $134.77, and options are flying off the shelves. 

In fact, MPWR stock has suffered a dramatic slide down the charts in October -- set to snap its four-month win streak with a 12.5% monthly deficit, so far. While the stock is still trading roughly 17% atop its year-to-date breakeven, it's threatening to close south of its 320-day moving average for the first time since late June, and is pacing for a third straight loss.

MPWR Chart Oct 9

Spruce Point's bear note has options traders going wild today, with 1,540 calls and 2,234 puts across the tape so far -- 53 times the intraday average. In fact, Monolithic Power has averaged daily options volume of just 51 calls and 211 puts. The December 130 put is seeing the most action, with one apparent buyer scooping up 1,000 contracts. The puts will move into the money if MPWR shares breach $130 by December options expiration.

This preference for puts seems to be the norm for the semiconductor stock, with a whopping 143.21 puts bought for every call on the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) during the last 10 days. Echoing this, MPWR's Schaeffer's put/call open interest ratio (SOIR) of 3.90 sits in the top percentile of its annual range, suggesting short-term players have never been more put heavy during the past 12 months. 

Analysts have been singing a much different tune, with eight of the 10 in coverage calling Monolithic a "buy" or better. Plus, the consensus 12-month target price of $166.50 is at a 23.4% premium, and represents a level that the stock has yet to touch. Should the shares of MPWR continue to fall, a round of downgrades could stir up even more headwinds on the charts. 


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