The semiconductor industry is in the midst of a severe downturn. As a result, stocks of technology's basic building blocks are down significantly. Since the start of 2022, semiconductor stocks are down 23%, as measured by the iShares Semiconductor ETF (NASDAQ: SOXX).
But not Microchip Technology (MCHP 5.21%). When adding in dividends, this top industrial chipmaker has dramatically outperformed its peers and is sporting just a 3% total return decline since the start of 2022. Though you may have never heard of it, this could be one of the best tech stocks to buy right now for the long term.
Bucking the current downturn in the chip industry
Microchip isn't just on a hot streak. It's also predicting continued outperformance of its peers during a downturn in the semiconductor market (driven by a severe decline in PC and smartphone sales, as well as weakness in the data center market due to oversupply of some components).
The company reported third-quarter fiscal 2023 (the three months ended December 31, 2022) revenue of $2.17 billion, up 23% year over year. Even more impressive, midpoint guidance for the quarter that ends in March 2023 implies 21% year-over-year sales growth of 21%. In a recent podcast episode, my colleague Billy Duberstein pointed out that this is far and away some of the best quarterly guidance provided in the flagging chip market.
For the sake of comparison, here's what some of Microchip's peers are forecasting for the comparable quarter (the start of calendar year 2023).
|
Company |
Q1 Calendar Year 2023 Revenue Guidance Midpoint |
Growth (Decline) YoY |
|---|---|---|
|
Microchip Technology |
$2.23 billion |
21% |
|
Texas Instruments (NASDAQ: TXN) |
$4.35 billion |
(11%) |
|
Analog Devices (NASDAQ: ADI) |
$3.2 billion |
7.8% |
|
NXP Semiconductors (NASDAQ: NXPI) |
$3.0 billion |
(4%) |
|
ON Semiconductor (NASDAQ: ON) |
$1.92 billion |
(1%) |
Data source: Microchip Technology, Texas Instruments, Analog Devices, NXP Semiconductors, and ONsemi.
Exceptional profitability since a key acquisition
Microchip made a key acquisition of its peer Microsemi in 2018, and it has enjoyed an incredible increase in financial efficiency since then. However, the company has highlighted that its industrial chip designs and (mostly) internal manufacturing capabilities have performed quite well in the last couple of decades, throughout the normal ups and downs of the semiconductor market. Resulting free cash flow has been rising steadily in grand fashion.
Data by YCharts.
Besides increasing its dividend payout and stock buybacks, Microchip has aggressively paid off debt associated with the Microsemi acquisition a few years back. Cash and short-term investments are a little light for my liking at $289 million at the end of December 2022. However, debt has been reduced from well over $9 billion a few years ago to $6.6 billion today.
Growth and income from top secular growth trends
Microchip's designs address secular growth trends like vehicle connectivity and electrification, manufacturing automation, data centers and the cloud, and the space economy. The company touts its ability to not just design and manufacture in-demand chips, but also accelerate its customers' time-to-market with a vertically integrated software stack.
I believe this could be a great growth and income stock for the long term. Shares trade for 22 times trailing 12-month earnings per share (14 times trailing 12-month free cash), and just 15 times current fiscal year expected earnings. For a company doling out a 1.8% dividend yield, buying back stock, and expected to deliver double-digit sales growth, this tech stock looks like a great buy right now. Microchip is on my watchlist.
