No Surprises In Microchip Technology's (NASDAQ:MCHP) Q4 Sales Numbers But Stock Drops

Adam Hejl /
2023/05/04 4:58 pm EDT
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Analog chipmaker Microchip Technology (NASDAQ:MCHP) reported results in line with analyst expectations in Q4 FY2023 quarter, with revenue up 21.1% year on year to $2.23 billion. Guidance for next quarter's revenue was $2.29 billion at the midpoint, which is 1.47% above the analyst consensus. Microchip Technology made a GAAP profit of $604 million, improving on its profit of $437.9 million, in the same quarter last year.

Is now the time to buy Microchip Technology? Access our full analysis of the earnings results here, it's free.

Microchip Technology (MCHP) Q4 FY2023 Highlights:

  • Revenue: $2.23 billion vs analyst estimates of $2.22 billion (small beat)
  • EPS (non-GAAP): $1.64 vs analyst estimates of $1.62 (1.21% beat)
  • Revenue guidance for Q1 2024 is $2.29 billion at the midpoint, above analyst estimates of $2.26 billion
  • Free cash flow of $596.8 million, down 47.5% from previous quarter
  • Inventory Days Outstanding: 169, up from 152 previous quarter
  • Gross Margin (GAAP): 68%, up from 66.2% same quarter last year

"We are very pleased with our strong financial and operational performance throughout fiscal 2023 as we continued to deliver on our Microchip 3.0 strategy," said Ganesh Moorthy, President and Chief Executive Officer.

Spun out from General Instrument in 1987, Microchip Technology (NASDAQ: MCHP) is a leading provider of microcontrollers and integrated circuits used mainly in the automotive world, especially in electric vehicles and their charging devices.

Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales Growth

Microchip Technology's revenue growth over the last three years has been mediocre, averaging 17.4% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $1.84 billion to $2.23 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Microchip Technology Total Revenue

This was a decent quarter for Microchip Technology as revenues grew 21.1%, topping analyst estimates by 0.4%. This marks 10 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

However, Microchip Technology believes the growth is set to continue, and is guiding for revenue to grow 16.5% YoY next quarter, and Wall St analysts are estimating growth 4.04% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Microchip Technology Inventory Days Outstanding

This quarter, Microchip Technology’s inventory days came in at 169, 37 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from Microchip Technology's Q4 Results

Sporting a market capitalization of $41.8 billion, more than $234 million in cash and with positive free cash flow over the last twelve months, we're confident that Microchip Technology has the resources it needs to pursue a high growth business strategy.

It was good to see Microchip Technology provide next quarter revenue outlook exceeding analysts’ expectations, although EPS guidance was in line. And we were also glad to see the improvement in gross margin. On the other hand, it was less good to see the inventory levels increase. Management also provided mixed macro commentary in the release. Overall, it seems to us that this was a complicated quarter for Microchip Technology. The company is down 7.92% on the results and currently trades at $70 per share.

Should you invest in Microchip Technology right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.