Microchip Earnings: Likely To Weather Any Upcoming Slowdowns; Maintain $90 FVE

Wide-moat Microchip Technology MCHP reported solid fiscal fourth-quarter results and provided investors with a resilient forecast for the June quarter. We maintain our $90 fair value estimate and continue to view shares as undervalued. Shares sold off about 5% after hours, likely because inventory is building up and Microchip is rescheduling some customer orders to avoid even more inventory being stuffed into the supply chain. Even if an inventory correction were to occur, 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.

Revenue in the March quarter was $2.23 billion, up 3% sequentially, up 21% year over year, and just above the midpoint of guidance of $2.22 billion. Revenue results are consistent with several peers that are seeing resilient demand from automotive and industrial customers, in particular. Meanwhile, Microchip added color that its FPGA chip business achieved record revenue of $550 million for the full year, all while generating above-average operating margins for the firm. Higher sales levels enabled adjusted gross margin to tick up by 20 basis points sequentially to 68.3%, and adjusted operating margin rose 10 basis points sequentially to 47.6%.

Microchip expects revenue in the June quarter to be up 1%-4% sequentially. At the midpoint of $2.29 billion, revenue would be up 16.5% year over year. The company still has a large backlog of noncancelable orders but is working with customers to push some of those orders out to a later date. The firm also aims to reduce its internal inventory, though such measures might not weigh on gross margins just yet. We think this is a prudent move, as shipping those parts now would lead to a shortfall in orders in future quarters. In turn, the firm is aiming for a smooth landing from the industrywide cyclical peak during the global chip shortage of 2021 and 2022.