Shares of Microchip Technology (MCHP 1.51%) are down over 15% from all-time highs following its latest quarterly earnings update. The drop had nothing to do with management not once uttering artificial intelligence (AI) or machine learning during its earnings call -- even though this most certainly is an AI chip company.
Rather, the market sold off Microchip because the semiconductor industry downturn has finally come for this company, too. The only difference is, this downturn for Microchip is still equating to year-over-year growth, while some of its peers take it on the chin. If you're looking for a new leader in industrial automation technology (ahem, AI) that also pays a rising dividend, Microchip is a need-to-know stock.
Microchip Technology's exceptional quarter and outlook
Let's talk first about the most recent financials. For its fiscal 2024 first quarter (the three months ended in June 2023), Microchip reported revenue of $2.29 billion, up 2.5% from the prior quarter and up 16.6% from the same period last year. That was a bit better than the guidance it provided a few months ago.
Operating profit margin clocked in at over 48%, and helped lead to a nearly 20% increase in adjusted earnings per share. Microchip has been using its rising profitability over the last few years to increase its dividend payout and repurchase stock. Dividends of $209 million were paid out last quarter (the dividend currently yields 1.8%), and share repurchases of $140 million were made in a solid return of excess cash to shareholders.
Data by YCharts. TTM = trailing 12 months.
So why the stock sell-off? Management's outlook seems to indicate that current global economic worry is affecting even Microchip. Guidance for the next quarter, which ends in September, implies "only" 9% year-over-year growth, which dips slightly below the targeted 10%-to-15% growth range through Microchip's fiscal year 2026.
A more pronounced slowdown could be coming during the final three months of 2023 as some customers need to delay chip shipments to manage their inventories and conserve cash.
Beating some of the best competition
What's especially noteworthy about Microchip is that it's beating some of its biggest competitors in the growth department. The specialty here is microcontrollers, or MCUs, chips that contain a processor, memory that stores a small software program, and other components that connect the MCU to the rest of a computing system. Some big names compete in this market, including Texas Instruments, NXP Semiconductor, and Infineon.
In the last quarter, Texas Instruments' small "embedded processing" segment was up 9% year over year. NXP's automotive segment and industrial and Internet of Things segment increased 9% and fell 19%, respectively.
And Infineon's automotive segment did grow 25% year over year, but it only makes up just over half of total sales.
Oh, and Microchip's margins far exceed NXP and Infineon's, while Texas Instruments is going through a rough patch on the margin front. And even in a cyclical downturn, Microchip believes its strong operations and long-lived chips it keeps on hand in inventory can help it maintain its high rate of profitability.
Data by YCharts.
Microchip touts its "full-system design" prowess -- chip design and integrated software -- as an easy way for its non-tech customers (industrialists and automakers, primarily) to implement AI.
The ease of use must be the real deal. Microchip reports steadily expanding long-term semiconductor supply arrangements with its biggest customers, helping it sustain its best-in-class growth, even as the chip industry gets hit with a slowdown.
Solutions the company offers have a long runway, too. MCUs are used in manufacturing robots, they control sensors in advanced driver-assist systems (and self-driving systems), they collect real-world data and send it to the cloud for analysis, they regulate and optimize the use of energy, and more.
Microchip isn't a household name, and likely isn't top of mind as an AI stock. But that's a shame. This company is growing, and shelling out rising amounts of cash to its investors along the way. The stock trades for just 13 times Wall Street analysts' expected earnings for next year after this post-earnings pullback. At that price -- and given its longer-term prospects -- I think it's worthy of a buy.
