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Stock Strategist

Market's Too Tough on Microchip

We see the short-term sell-off as a long-term buying opportunity.

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 Microchip Technology’s (MCHP) fiscal first-quarter earnings report and second-quarter forecast were noisy and eventful, as the company incorporated its recent sizable acquisition of Microsemi, noted strategic steps to improve this newly acquired business, and cited a handful of headwinds with various near-term implications for short-term revenue for the combined company and, perhaps, many other broad-based chipmakers. We are mildly concerned that management was cautious about chip demand associated with products wrapped up in worldwide tariff negotiations, although we note that the guidance doesn’t imply that sales are falling off a cliff anytime soon. For a company that is often considered a canary in the coal mine for semis, however, tariffs may loom as a growing concern for the industry in the months ahead.

We view other revenue headwinds, such as lower demand from bitcoin customers, lost business at ZTE, and the ramifications of a passive component shortage, as near-term bumps that don’t concern us long term. Perhaps more important, the company continues to see long-term synergy and cross-selling opportunities from Microsemi, which has made its prior fiscal 2021 adjusted earnings per share target of $8 appear “conservative,” consistent with our long-term thesis that Microchip and its exemplary management team will extract greater profitability from Microsemi.

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Brian Colello does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.