Chandler, AZ

Arizona-based Microchip Technology Surges on Higher Revenue and Profits

Mark Hake

This is not financial advice and you should not rely on my analysis to buy or sell any stock. I am not undertaking to induce you to buy or sell any securities. I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

Chandler, Arizona-based Microchip Technology (MCHP) reported record revenue, profits, and free cash flow on Aug. 2 for the quarter ending June 30. This was its fiscal Q1 for 2023.

The company said that it posted a record quarterly revenue of $1.964 billion, up 6.5% over the prior quarter, and over 25.1% from last year. This is also the 7th consecutive quarter of record revenue.

On top of this, the company produced other records. For example, its operating margin hit a record of 45.6%. This is a very high level even for software companies.

In addition, the company generated $786 million in free cash flow (FCF), which represents 36.6% of revenue. This is also a very high margin rate, even for semiconductor companies.

Much of this record revenue and FCF was a result of the pandemic-led chip shortage. Over 54% of its revenue in the past quarter was from selling microcontrollers, according to the earnings call by the CEO, Ganesh Moorthy. These are used in the Internet of Things (IoT) and to control embedded systems in machines, robots, appliances, and motors.

It also didn't hurt that China continues to show huge problems with its various Covid shutdowns, including in Shanghai, given their unwillingness to deploy Western vaccines.

Where This Leaves Investors in MCHP Stock

Right now analysts forecast that MCHP will reach $5.66 for the year ending March 2023, and slightly higher at $5.71 in the following year.

As of Aug. 3, MCHP stock closed at $73.22, putting it on a forward price-to-earnings (P/E) multiple of 12.9x and just 12.8x for next year.

However, given that the company produced much higher earnings than forecast for its fiscal Q1 it's possible analysts' earnings forecasts could be too low.

For example, earnings per share (EPS) came in at $1.37 per share, whereas analysts forecast $1.34 per share. And revenue came in $11.9 million higher than analysts' projections, according to Seeking Alpha.

One way to value the company is to use free cash flow margins and FCF yield. For example, using a 36.6% FCF margin, and applying it to analysts' forecast of $8.13 billion in revenue this year, it could produce almost $3 billion in FCF (i.e., $2.976 billion).

And using a 6% FCF yield metric is the same as using a 16.667 FCF multiple to value its FCF. So multiplying $3 billion by 16.667 results in a target market capitalization of $50 billion. That is over 30.6% over the company's present $38.3 billion market value.

This implies that MCHP stock could be worth $95.62, or 30.6% over today's price of $73.22. This target is close to the average of 18 analysts surveyed by TipRanks, who have an average price of $85.13 per share.

As a result, investors might be able to see the stock move substantially higher this year.

*************

Don't forget to fully "Follow" me and download the Newsbreak app to become a Registered Follower. This way you can also see all my articles in the past. Click on the link underneath my profile name above.

Mark R. Hake, CFA writes articles at InvestorPlace.com, Barchart.com, Medium.com, and Newsbreak.com as well as a Beehiiv free newsletter on stocks and cryptos.

Comments / 0

Published by

Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
3205 followers

More from Mark Hake

Comments / 0