Valued at $31.8 billion, Microchip Technology Inc. (MCHP) is a semiconductor company based out of Chandler, Arizona. The company is focused on microcontrollers, memory and analog and interface products for embedded control systems, and also offers solutions for data centers.
MCHP Stock is Underperforming
When it comes to price action, MCHP has more in common with its analog semiconductor peers than pure-play artificial intelligence (AI) data center stocks. The shares have slumped more than 31% on a year-to-date basis, significantly underperforming the broader equities market.
MCHP currently trades near two-year lows, down about 40% from its May highs.
The stock still isn't particularly cheap, by historical standards. MCHP is valued at 36.74 times forward adjusted earnings, nearly double its five-year average valuation of 18.94. The shares are priced 3.98 times forward price/earnings-to-growth (PEG), compared to the tech sector median of 1.94 - confirming that investors are still paying a premium for Microchip stock at current levels.
However, the tech stock's yield does look relatively attractive following this period of underperformance. Based on the quarterly dividend payout of $0.46, MCHP yields 3.07%, and this generous dividend is backed by over two decades of consistent growth.
Microchip Slips on Soft Guidance
Microchip posted its fiscal second-quarter earnings after the close on Nov. 5, and the stock closed slightly lower in response as investors weighed a Q2 beat against lighter-than-expected guidance.
For the second quarter, MCHP posted a profit of $78.4 million, or $0.46 per share on an adjusted basis, which beat analysts' $0.43 per share estimate. On the revenue front, the semiconductor company raked in $1.16 billion, edging past estimates of $1.15 billion.
However, for Q3, Microchip expects adjusted earnings between $0.25 and $0.35 per share, with sales expected between $1.025 billion and $1.095 billion. Analysts, on average, were anticipating current-quarter earnings of $0.46 per share on $1.18 billion in revenue.
In early December, management again lowered its guidance, targeting the lower end of its prior range ($1.025 billion) as it looks to shutter its Tempe wafer fab by the September 2025 quarter. The company says the reduced forecast is in response to soft orders, with the foundry closure expected to yield cash savings of $90 million annually.
What Do Analysts Say About Microchip?
The company’s restructuring is expected to cost around $3 billion to $8 billion in the near term, but analysts are still strongly in Microchip's corner, with a consensus rating of “Strong Buy” from the 22 experts in coverage.
Following the guidance cut, Citi analyst Christopher Danely reiterated a “Buy” rating and $82 price target, citing confidence in returning CEO Steve Sanghi.
"Sales are roughly 20% below pre-COVID levels and given Steve Sanghi's extensive experience in managing MCHP through downturns, we remain confident in MCHP's sales bouncing back faster than peers," wrote Danely in a note to clients.
The average price target for MCHP stock among analysts is $85.14, suggesting expected upside of 37% from current levels.
