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Microchip (MCHP) Resilient About Prospects Despite Challenges

Microchip Technology MCHP recently announced that it is on track to meet its previously announced revenue guidance for the third quarter of 2022.

Microchip expects its consolidated net sales for the third quarter of 2022 to be between $2.135 billion and $2.177 billion, representing 22.7% year-over-year growth at the mid-point of the guidance range. MCHP expects revenue growth despite continuing supply chain constraints still impacting the company’s operations.

The Zacks Consensus Estimate for third-quarter revenues is pegged at $2.15 billion, representing year-over-year growth of about 22.5%.

Microchip is facing severe backlogs. However, its recent growth in revenues can be attributed to the factor that Microchip is addressing certain key megatrends such as AI and ML and its strategic investments in high-growth, high-margin and high-cash-generating businesses in the semiconductor industry. In the last reported second quarter of 2022, net sales of $2.07 billion increased 25.7% year over year and surpassed the Zacks Consensus Estimate by 0.52%.

Microchip Technology Incorporated Price and Consensus

Microchip Technology Incorporated Price and Consensus
Microchip Technology Incorporated Price and Consensus

Microchip Technology Incorporated price-consensus-chart | Microchip Technology Incorporated Quote

Microchip Addressing Megatrends for Organic Growth

The entire Semiconductor - Analog and Mixed industry is reeling under various operational challenges due to the macro-economic turmoil and geopolitical tensions. This has affected Microchip’s shares along with its peer, Analog Devices ADI.

Microchip shares have fallen 14.6% in the year-to-date period (YTD) compared with the Zacks Semiconductor - Analog and Mixed industry’s decline of 14.5%.

ADI shares are down 6.7% in the YTD period even though it continues to enjoy solid demand for high-performance analog and mixed-signal solutions, which consistently impacted its revenue growth positively. Overall negative sentiment in the market made investors bearish on the stock.

However, Microchip, which currently carries a Zacks Rank #3 (Hold), is one of the semiconductor sector companies, which is looking to benefit from the CHIPS and Science Act. This act supports investments in domestic semiconductor manufacturing and reduces dependence on foreign markets like China. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

MCHP’s peer, onsemi ON is already benefiting from the recent declaration of the act by the government.

onsemi shares have inched up 3% in the YTD period, reflecting positive impacts from the newly-signed act and bullish investor sentiments as it provides returns in double digits in high-growth industries like automotive.

The recently signed act by the Biden organization will see a boost of $52 billion in the U.S. chip industry and reduce its dependency on outside sources like China for manufacturing.

This will help to reduce certain supply chain constraints faced globally and cut back on severe backlogs faced by the company and address high-margin key megatrends like AI and ML.

Per Microchip, due to the rise in artificial intelligence (AI) and machine learning (ML) applications, the total port bandwidth for 400G (gigabits per second) and 800G is forecasted to grow at more than 50% annually. As a result, demand for 112G PAM4 connectivity is increasing beyond the cloud data center and telecom services to enterprise ethernet switching platforms.

To meet the demand for better connectivity to address key megatrends such as AI and ML, which are at the forefront of the fourth industrial revolution, Microchip is expanding its Ethernet PHY with the launch of its latest META-DX2+ Ethernet PHYs.

However, as MCHP is looking to diversify its portfolio to address the growing need for increased bandwidth, other tech companies like Broadcom AVGO are also jumping at the opportunity.

Broadcom also recently announced that it is launching its new Trident 4C Ethernet switch ASIC to address the growing security issues with increasing network bandwidth. Broadcom has been expanding its switch series for a while to address one of the most prevalent issues in the market currently, to accurately and securely handle growing network bandwidth.

To diversify income from its microcontroller business riddled with supply-chain disturbances, Microchip continues developing and introducing a wide range of innovative and proprietary new linear, mixed-signal, power, interface and timing products to spur growth in the analog business. These factors will enable Microchip to maintain sustainable revenue growth and expand its margins in the to-be-reported quarter.

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