Microchip Technology Stock: Concerns Over Valuation and Performance

Microchip Technology Stock (NASDAQ:MCHP) has experienced a significant rise, gaining nearly 12% in Friday’s trading and up 17% over the past five trading days. These gains followed the company’s better-than-expected Q4 FY’25 earnings and an optimistic top-line forecast for Q1 FY’26. However, demand for Microchip’s low-end semiconductors has slowed recently in sectors such as automotive and industrial electronics, resultingin higher inventory and reduced order volumes, contributing to a decline of about 50% from the mid-2024 peak. The question remains: Has MCHP Stock turned a corner, or is it still a risky investment?

Image by Nico Franz from Pixabay

Currently, we view MCHP Stock as unattractive, making it a questionable investment at approximately $60. Multiple factors lead us to believe that its current valuation appears excessively high.

Our assessment is based on a comparison of MCHP Stock with its recent operating performance and its financial health. Evaluating Microchip Technology along essential metrics such as Growth, Profitability, Financial Stability, and Downturn Resilience indicates that the company is exhibiting a very weak operating performance and financial standing.

Valuation of Microchip Technology Compared to the S&P 500

When examining price per dollar of sales and profit, MCHP Stock appears costly compared to the S&P 500.

• Microchip Technology’s price-to-sales (P/S) ratio stands at 5.2, while the S&P 500 is at 2.8.
• The company’s price-to-free cash flow (P/FCF) ratio is 22.0 compared to 17.6 for the S&P 500.
• Lastly, MCHP has a price-to-earnings (P/E) ratio of 79.9 versus the S&P 500’s 24.5.

Recent Revenue Trends for Microchip Technology

Microchip Technology has experienced significant revenue declines in recent years.

• Revenues have contracted at an average rate of 4.4% during the last three years, contrasting with a 6.2% increase for the S&P 500.
• Recent revenue figures reveal a 44.3% decline, dropping from $8.5 billion to $4.8 billion over the past year, while the S&P 500 grew by 5.3%.
• Quarterly revenues also decreased by 41.9%, plummeting to $1.0 billion from $1.8 billion a year earlier, compared to a 4.9% gain for the S&P 500.

Profitability Analysis of Microchip Technology

Microchip Technology’s profit margins are less favorable than those of its peers.

• For the last four quarters, the company reported an operating income of $641 million, resulting in a weak Operating Margin of 13.5%, slightly better than the S&P 500’s 13.1%.
• The Operating Cash Flow (OCF) was $1.1 billion, yielding a moderate OCF Margin of 23.6%, compared to 15.7% for the S&P 500.
• Net income for this period was $309 million, equating to a Net Income Margin of 6.5%, versus the S&P 500’s 11.3%.

Financial Stability of Microchip Technology

Microchip Technology’s balance sheet appears weak.

• As of the latest quarter, debt stood at $6.8 billion with a market capitalization of $30 billion, leading to a Debt-to-Equity Ratio of 27.5%, higher than the S&P 500’s 21.5%.
• Cash, including cash equivalents, totals $586 million of the $16 billion in total assets, resulting in a low Cash-to-Assets Ratio of 3.8%, compared to 15.0% for the S&P 500.

Downturn Resilience of MCHP Stock

MCHP Stock has underperformed against the S&P 500 in recent downturns. Concerned about how a market decline could affect MCHP Stock? Our dashboard, “How Low Can Microchip Technology Stock Go In A Market Crash?” provides a detailed analysis of prior downturn events.

Inflation Shock (2022)

• MCHP Stock dropped 37.2% from $89.35 on December 27, 2021, to $56.14 on July 5, 2022, versus a 25.4% decline for the S&P 500.
• The Stock fully recovered its initial peak by June 30, 2023.

Covid Pandemic (2020)

• MCHP Stock fell 49.9% from $55.60 on January 13, 2020, to $27.89 on March 16, 2020, compared to a peak-to-trough decline of 33.9% for the S&P 500.
• The Stock recovered fully by September 1, 2020.

Global Financial Crisis (2008)

• MCHP Stock declined 60.6% from $21.03 on June 15, 2007, to $8.29 on January 20, 2009, while the S&P 500 saw a decline of 56.8%.
• The Stock fully recovered by October 31, 2013.

Conclusion: Outlook for MCHP Stock

In summary, Microchip Technology’s performance in key areas can be categorized as follows:

• Growth: Extremely Weak
• Profitability: Weak
• Financial Stability: Weak
• Downturn Resilience: Weak
• Overall: Very Weak

Given the company’s high valuation, we consider the Stock to be extremely unattractive, reinforcing our stance that MCHP is a poor investment option at this time.

While it may be wise to steer clear of MCHP Stock for the time being, investors looking for lower volatility might consider the Trefis Reinforced Value (RV) Portfolio, which has effectively outperformed its broad-market benchmarks.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.