A Leading Chipmaker Despite Virus Concerns

Despite concerns about the COVID-19 virus, a potential oil price war, and a recent stock market sell-off, we will maintain our fair value estimates for several wide-moat analog and mixed signal chipmakers across our coverage, such as Microchip Technology ($108 fair value estimate) MCHP, Texas Instruments ($115) TXN, Analog Devices ($98) ADI, and Maxim Integrated ($55) MXIM. Microchip remains our preferred investment idea in the sector; the stock was a Best Idea in most of 2019 and recently reached our unchanged fair value. However, with shares as low as $78, we think investors have another opportunity to buy this leading wide-moat, broad based chipmaker with an exemplary management team. The other three stocks are equally high quality but only appear to us to be fairly valued after being overvalued as of a couple of weeks ago.

We anticipate that the recent stock market turbulence will become self-fulfilling to chip fundamentals in the near term. Combined with virus headwinds, we suspect that chip customers will likely remain cautious about near-term demand and, in turn, chip orders needed to fulfill their production. Although an industry “bottom” appeared to be formed in late 2019, we fear that an uptick is no longer on the immediate horizon. We have reduced our near-term revenue estimates for Microchip and TI in particular; we now project flattish sales for TI in 2020 and 5% growth in fiscal 2021 (ending March) for Microchip versus the “easy” comparisons of fiscal 2020. Even though chip inventory appears to be at low levels for customers, we’re concerned that these macro issues will also weigh on true end market demand. That said, we also project a stronger snapback in demand after this near-term slowdown, thus negating any drag on our fair value estimate. Longer term, we still believe that the secular trends of rising chip content in automotive, industrial, and "Internet of Things" devices is fully intact.

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