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Microchip Technology (NASDAQ:MCHP) Misses Q2 Analysts' Revenue Estimates

StockStory - Thu Nov 2, 2023

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Analog chipmaker Microchip Technology (NASDAQ:MCHP) missed analysts' expectations in Q2 FY2024, with revenue up 8.74% year on year to $2.25 billion. Turning to EPS, Microchip Technology made a non-GAAP profit of $1.62 per share, improving from its profit of $1.46 per share in the same quarter last year.

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Microchip Technology (MCHP) Q2 FY2024 Highlights:

  • Revenue: $2.25 billion vs analyst estimates of $2.27 billion (0.53% miss)
  • EPS (non-GAAP): $1.62 vs analyst expectations of $1.62 (small miss)
  • Revenue Guidance for Q3 2024 is $1.86 billion at the midpoint, below analyst estimates of $2.11 billion
  • Free Cash Flow of $541.8 million, down 38.6% from the previous quarter
  • Inventory Days Outstanding: 167, up from 167 in the previous quarter
  • Gross Margin (GAAP): 67.8%, in line with the same quarter last year

"Amid a turbulent macro environment, we delivered fiscal second-quarter results that were in line with our guidance," said Ganesh Moorthy, President and Chief Executive Officer.

Spun out from General Instrument in 1987, Microchip Technology (NASDAQ: MCHP) is a leading provider of microcontrollers and integrated circuits used mainly in the automotive world, especially in electric vehicles and their charging devices.

Analog Semiconductors

Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales Growth

Microchip Technology's revenue growth over the last three years has been solid, averaging 19.8% annually. But as you can see below, this quarter wasn't particularly strong, with revenue growing from $2.07 billion in the same quarter last year to $2.25 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Microchip Technology Total Revenue

Microchip Technology had a slow quarter as its unremarkable 8.74% year-on-year revenue growth missed analysts' estimates by 0.53%. This was its third consecutive quarter of decelerating growth, indicating a potential cycle downturn.

Microchip Technology's revenue growth has decelerated over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 14.3% year-on-year revenue decline while analysts are expecting a 5.61% drop over the next 12 months.

Our recent pick has been a big winner, and the stock is up more than 2,000% since the IPO a decade ago. If you didn’t buy then, you have another chance today. The business is much less risky now than it was in the years after going public. The company is a clear market leader in a huge, growing $200 billion market. Its $7 billion of revenue only scratches the surface. Its products are mission critical. Virtually no customers ever left the company. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

Microchip Technology Inventory Days Outstanding

This quarter, Microchip Technology's DIO came in at 167, which is 36 days above its five-year average, suggesting that the company's inventory levels are higher than what we've seen in the past.

Key Takeaways from Microchip Technology's Q2 Results

With a market capitalization of $38.7 billion, a $256.6 million cash balance, and positive free cash flow over the last 12 months, we're confident that Microchip Technology has the resources needed to pursue a high-growth business strategy.

We struggled to find many strong positives in these results. Its revenue missed Wall Street's estimates and its revenue guidance for next quarter underwhelmed. Lowered top-line expectations are something we've observed in the semiconductor industry this quarter amid macroeconomic concerns. Overall, this was a mediocre quarter for Microchip Technology. The company is down 3.37% on the results and currently trades at $71.1 per share.

Microchip Technology may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.

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The author has no position in any of the stocks mentioned in this report.

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