Microchip Technology Earnings: Firm Braces for Cyclical Downturn

Wide-moat Microchip Technology reported decent fiscal 2024 second-quarter results but provided investors with a gloomy forecast by guiding to its worst sequential revenue decline in at least a decade, and likely since the credit crisis. We don’t believe business conditions have deteriorated to levels seen during that panic. We attribute the revenue shortfall to inventory digestion after a couple of years of tremendous growth, as customers rushed to place orders with Microchip (many of which were part of its noncancellable customer program). While we expect this inventory correction to damp results in the near term, we consider Microchip to be particularly adept at navigating industry cycles, and we often find downturns to be attractive buying opportunities for patient investors with a long-term time horizon. We maintain our $90 fair value estimate, and we view the shares as undervalued.