Microchip stock rises ahead of earnings: inventories will be key

Microchip Technology (NASDAQ: MCHP) stock price has lagged behind the broader market and the semiconductor industry. It has dropped by 1.55% this year even as other chip stocks like Nvidia and ASML have soared. Its performance has also lagged that of the tech-heavy Nasdaq 100 index and S&P 500 indices. 

Growth has slowed

Microchip Technology is a large semiconductor company that few people know about. Unlike AMD and Nvidia, the firm does not manufacture the popular GPU and CPU products found in everyday products like smartphones and tablets.

Instead, Microchip Technology manufactures products like traditional semiconductors, which are mostly analog. Its other products are microprocessors, amplifiers, descretes, and memory products. 

Its products are used widely in most technology items. Some of the biggest clients are companies in the automobile and other industrial sectors. It competes with companies like Texas Instrument and NXP Semiconductor.

As we saw during the COVID-19 pandemic, these products are highly important in the global industrial space. In this, these products are used in areas like sensors, power management, timing devices, and data converters. 

Microchip Technology and other similar companies saw robust revenue growth during the pandemic as shortages led to higher pricing. As a result, its annual revenue has risen from over $5.27 billion in 2019 to a peak of $8.4 billion in 2022.

Recently, however, MCHP has slowed down, as demand from automakers and other industrial companies retreated. It has also suffered substantially because of elevated inventories after ramping production after the pandemic.

Microchip is not alone. Texas Instrument’s stock has only risen by 13% in the past 12 months while NXP Semiconductors has jumped by just 18% in the same period. 

Microchip’s business is under pressure

The most recent financial results showed that Microchip’s revenue slumped by 25% in the first quarter to $1.32 billion from Q4. It dropped by 40% from the same period in 2023. The company attributed this drop to the ongoing slowdown in its key analog segment and high inventory levels. The CEO said:

"We believe we are under shipping to end market demand, as customers and channel partners continued to reduce inventory. This situation has required us to implement ongoing austerity measures, including taking actions to reduce factory utilization, that will persist into the June quarter.”

Microchip Technology’s operating income came in at $253 million while its net income retreated to $154.7 million. For the year, its revenue dropped by 9.5% to $7.6 billion. 

Microchip Q1 earnings ahead

The next important catalyst for the Microchip stock price will be its earnings scheduled for Thursday. In the last quarter, the management guided to net sales of between $1.22 billion and $1.26 billion. Its net income is expected to come in at between $103 million and $128 million. 

The average estimate among analysts is that its revenue will come in at $1.24 billion, down from $2.29 billion a year earlier. They also expect that its annual revenue will slow down from $7.63 billion in 2023 to $5.48 billion.

Therefore, there are concerns that Microchip, a company seeing negative revenue and profitability growth, is severely overvalued. It has a forward P/E ratio of 66, higher than Nvidia’s 39 and the sector median of 29. 

It also has a forward EV-to-EBITDA multiple of 25, higher than the sector median of 14.5. This is a clear sign that the company is overvalued given its $45 billion market cap. 

The valuation means that the management will need to execute well and improve its business metrics. It will also need to execute a good turnaround and boost its profitability. Most importantly, the company will need to improve on its inventory levels.

Despite these challenges, many analysts are bullish on the company. The most notable ones are those from Rosenblatt, Susquehanna, and Citigroup who have a buy rating. Mizuho upgraded the stock from neutral to buy in May. 

Not everyone is convinced. In a recent statement, analysts at Morgan Stanley downgraded the company from overweight to equal weight. 

Microchip stock price analysis

MCHP chart by TradingView

The daily chart shows that the MCHP share price has been in a slow upward trend in the past few months. It has risen from its 2022 low of $52.32 to a high of $100 earlier this year. Recently, however, the stock has pulled back to $88.

The stock recently formed a doji pattern, a popular bullish reversal sign. This doji happened after it retested the lower side of the ascending channel pattern. 

The stock has remained slightly below the 23.6% Fibonacci Retracement point. It has also dropped below the 50-day Exponential Moving Average (EMA). Therefore, I suspect that the stock will have a bearish breakout in the after earnings. If this happens, it will likely retest the key support point at $83.6, its lowest point in July.