Microchip Technology (MCHP, Financial) offers a wide array of components ranging from microcontrollers to sensors to power management solutions.
The company recently reported solid results for its fourth quarter of fiscal 2021, backed by robust demand for chips used in a variety of end markets. As the global semiconductor shortage rages on, the company has worked to build a Preferred Supply Program to improve customer order visibility. It has also carried out pertinent acquisitions over the years such as Microsemi and Atmel, which are benefitting the company.
While the company seems to be doing well, and management even recently announced a hike in cash dividends, the stock price has soared to phenomenal heights. This begs the question: is Microchip really worth buying at such a sky-high price?
Recent financial performance
Microchip's upward trajectory over the past 12 months was driven by a strong of all-around beats.
For the most recent result for Q4 2021, the company reported a top-line of $1.47 billion, which was a 10.61% appreciation as compared to the $1.33 billion revenue reported in the corresponding quarter of 2020. The company beat the analyst consensus estimate of $1.46 billion.
These revenues translated into a gross margin of 63.17% and an operating margin of 20.69%, which were higher than in the same quarter of last year.
Microchip reported net income of $116 million and adjusted earnings per share (EPS) of $1.85, which surpassed the average Wall Street expectation of $1.74. It was the sixth consecutive earnings beat reported by the company.
Expansion of Radiation-Hardened Arm Microcontroller
In April 2021, Microchip announced the development of Its Radiation-Hardened ArmMicrocontroller Family for Space Systems. The company reported the qualification of its SAMRH71 Arm-based microprocessor and the availability of the SAMRH707 microcontroller, both implementing Arm Cortex-M7 SoC radiation-hardened technology. This will allow system designers better integration and higher performance while reducing development costs and time to market.
The management believes that the introduction of these Arm technologies for space applications opens doors in new perspectives by enabling the use of the same ecosystem well in place in the consumer and industrial sector. Moreover, The SAMRH71 is the first Arm Cortex M7-based rad-hard microprocessor available today on the market offering developers the simplicity of a single-core processor and the performance of an advanced architecture without the need to implement heavy mitigation techniques as is required for non-space components.
This addition to Microchip's easy-to-use development tools and comprehensive product portfolio looks promising and may become a key growth driver in the future.
Preferred Supply Program
The global shortage of semiconductor chips has disrupted manufacturing across various sectors, and companies have been scrambling to help overcome the shortage. In response to this imbalance between demand and supply, Microchip launched Preferred Supply Program (PSP) to provide customers with supply priority beginning six months after their order in exchange for at least 12 months of noncancelable orders.
About 44% of the company's backlog is within the PSP category, giving it a solid foundation to prudently acquire constrained raw materials, invest in expanding factory capacity and hire employees to support factory ramps. Moreover, as a result of strong factory utilization and improved product mix, the company was also able to witness margin expansion.
Microchip is also working extensively with its supply chain partners who provide wafer foundry, assembly, test and materials to secure additional capacity wherever possible. The management expects wafer fab, as well as assembly and test constraints, will persist throughout the year and quite likely into 2022. I believe that Microchip will eventually realize the upside from securing a greater-than-expected chip supply given its current backlog.
Final thoughts
The semiconductor industry is highly cyclical in nature, and Microchip is in the middle of an upswing story. The stock price has appreciated by more than 50% in the past 12 months owing to chips shortage and the rapidly rising demand across automotive and industrial markets.
The company is trading at a price-earnings multiple close to 110 and an enterprise-value-to-revenue ratio of 8.67, which are both significantly higher than the median range for the semiconductors industry and reflect the optimistic view that the market holds for this company.
While Microchip is making extensive efforts to make the most out of the shortage situation with its PSP and other initiatives, the future growth is well factored into the current stock price. In my opinion, the stock should be best avoided at current levels.
Disclosure: No positions.
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