Growing Margins Could Help Microchip Technology Stock Regain Early-2021 Highs

Despite a 2.5x rise from its low in March 2020, at the current price of $145 per share, we believe Microchip Technology stock (NASDAQ: MCHP) has further upside potential. Microchip stock rose from $58 in March 2020 to $145 currently, while the S&P increased by around 90% from its lows. Further, the stock is up over 30% from the level it was at before the pandemic. However, we believe that Microchip stock could rise almost 15% to regain its April 2021 high of $166, driven by expectations of steady, continuing demand growth and strong full-year 2021 results. Our dashboard What Factors Drove 103% Change In Microchip Technology Stock Between 2018 And Now? has the underlying numbers behind our thinking.

Microchip Technology is a manufacturer of microcontrollers, mixed-signal, analog, and Flash-IP integrated circuits. The stock price rise since 2018-end came due to a 2% rise in revenue from $5.35 billion in FY 2019 to $5.44 billion in FY 2021 (Microchip’s fiscal year ends in March). Net margins dropped from 6.7% to 6.4% over this period, and combined with a 12% rise in the outstanding share count, EPS dropped 11% from $1.51 in 2019 to $1.35 in FY 2021.

Meanwhile, Microchip’s P/E (price-to-earnings) multiple rose from 69x in 2019 to 110x currently, on the back of steady semiconductor demand growth. Further, we believe that the company’s P/E ratio has the potential to increase more in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns initially affected manufacturing activities, hampering semiconductor demand from a variety of industries. However, with economies opening up, industrial activity has picked up and demand for Microchip’s products is back on track. This is evident from Microchip’s FY 2021 earnings, where revenue came in at $5.4 billion, up from $5.2 billion in FY 2020. Furthermore, with controlled expenses, operating income jumped more than 1.5x from $647 million to $998 million over this period. Comparatively, EPS came in lower at $1.35, down from $2.39 but that was mainly due to a large $420 million tax benefit in FY 2020.

Further, with the lockdowns being lifted and vaccines being administered globally, we believe the company will continue seeing strong revenue growth in the medium term, and if Microchip Technology continues to successfully control expenses, profitability could rise further in the near to medium term. This will raise investor expectations, driving up the company’s P/E multiple. We believe that Microchip stock can rise almost 15% from current levels, to regain its recent highs of $166.

While Microchip Technology stock may move higher, it is helpful to know how its peers stack up. Microchip Technology Stock Comparison With Peers summarizes how Microchip Technology compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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