Microchip Technology Shifting Toward A Lucrative, Sustainable Model, But Sentiment Is A Real Concern

 

Writing about Microchip Technology (NASDAQ:MCHP) a year ago, I was concerned more about the eventual shift in investor sentiment on semiconductor stocks than any fundamental issues with Microchip. Indeed, while Microchip continues to execute at a high level, the shares have lagged the SOX since that last update, and I do still see some risk to sell-side estimates as industry capacity eventually catches up to still-hot demand.

I like Microchip's strategic shift to a focus on leveraging its broad capabilities across a range of markets, a move that should drive better sustainable margins and stronger cash returns to shareholders. What I don't like as much is the relatively more modest leverage to faster-growing sub-markets, as well as the sour market sentiment on this sector. Mid-to-high single-digit revenue and FCF growth can support a decent high single-digit long-term return here, but there are cheaper names with better leverage to end-markets I like better.

 

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Microchip Technology Shifting Toward A Lucrative, Sustainable Model, But Sentiment Is A Real Concern