MCHP - Microchip Technology: Revenue Continues To Decline As Inventory Destocking Persists

2024-02-12 12:42:48 ET

Summary

• Revenue declined to $1.77B in the quarter, a 22.8% drop from the peak. Guidance anticipates revenue declining even more to $1.33B next quarter, a 42.1% decline from peak.
• Management was unable to provide guidance on when the downturn will moderate or what the recovery would look like.
• Microchip is a shareholder-friendly company, and despite weakness, this quarter will see the largest shareholder returns (dividends + share buybacks) in the company’s history.
• The current share price does not appropriately reward the current level of risk, but Microchip is worth watching into the future because long term demand for their products should be robust despite present weakness.

Investment Thesis

Microchip Technologies ( MCHP ) is a diversified provider of microcontrollers, analog, and related computer chips for a wide range of industries. It has historically had strong growth as the company focused on expanding the breadth of its product line in order to provide its clients with a one-stop shop. When I first covered Microchip almost six months ago (Q1FY24, ending June 30 ^th 2023) they had just completed their 11th quarter of sequential revenue growth at a CAGR of approximately 25%. However, management stated that they had started to see weakness in their client base. Around this time, interest rates were hitting their peak and clients were looking for ways to reduce their extra inventory that had amassed in the prior quarters. Management warned that the following quarter would see sales decline and they hinted that Q3 could be even worse. Q3 earnings were released at the start of February, and the decline in sales has been significant (-22.8% peak to present) and the guidance for next quarter is even worse (-42.1% peak to guide)....

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