Microchip Technology Now Fully Valued?

After a 83% rise since its low in March, at the current price of around $102 per share we believe Microchip Technology stock (NASDAQ: MCHP) has reached its near term potential. MCHP stock has rallied from $56 to $102 off the recent bottom compared to the S&P which moved 45%. Further, MCHP stock is up about 45% from levels seen at the end of 2018, a little over a year ago.

MCHP stock has almost reached the level it was at before the drop in March due to the coronavirus outbreak becoming a pandemic. This seems to make it appear fully valued as, in reality, demand and revenues will likely be affected this year.

This rise over the past year came due to a 32% increase in MCHP revenues from 2018 to 2020 (MCHP’s fiscal year ends in March), which despite a 3% rise in the outstanding share count, led to a 29% rise in revenue per share.

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Further, its P/S multiple saw an increase from 4.1x in 2018 to 4.6x in 2019, and stands at the same level so far this year. Further, we believe the stock is unlikely to see significant upside despite the recent rally, owing to the potential weakness from a recession driven by the Covid outbreak. Our interactive dashboard What Factors Drove 45% Change in Microchip Technology Stock between 2018 and now? has the underlying numbers.

MCHP’s P/S multiple has increased from 4.1x in 2018 to 4.6x currently. We believe there is possible downside given the severity of the current situation.

So what’s the likely trigger and timing for this downside?

The global spread of Coronavirus has meant there is much lower demand for computing and hardware devices across all markets, which means lower semiconductor demand, and hence lower demand for MCHP’s products. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. We believe MCHP’s Q1 ’21 results in August will confirm the hit to its revenue. It is also likely to accompany a lower Q2 ’21 guidance.

Regardless, if there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/S decline from the current level of 4.6x to 4.1x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to around $85.

To see the impact the current pandemic could have on MCHP’s peer Texas Instruments, view our interactive dashboard, Texas Instruments Downside: How Low Can Texas Instruments Stock Go?

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