Why This Stock Will Soar In ValueAug 03, 2021
Microchip Technology Overview:
Microchip Technology is set to report earnings later today and their stock is up 40% in the last year. However this year, the stock is stuck in a very choppy trading cycle. As a company operating in the extremely competitive semi-conductor space, this quarter's earnings report should shed some serious light on the next generation of this company.
Do we think earnings later today is going to push the stock up or down? Let's break it down below!
Microchip Technology Earnings:
First off, let us preface this section by saying that we love Microchip Technology (MCHP). It is one of our top names in the sector.
However, in recent weeks, the stock has been hit with volatility given the lack of confidence in the overall sector. With mixed results reported to date, investors are questioning how this report will pan out for the company. While we are positive on the recovery of the semiconductor industry, given the recent shortage, we are still being extremely cautious in the short term given the mix of guidance across the analyst space. Therefore we go into tonight's earnings report being very cautious on the outcome. While it could easily go in either direction, the risk right now isn't worth the short term trade. This is a gamble to all and therefore we are opting to pass this short term trade opportunity up.
Microchip Technology Opportunity:
However, the real opportunity with their stock is over the next 6-12 months as their risk/reward profile and growth opportunities set them up to be an attractive investment opportunity. So if they're not attractive in the short term then why do we like them in the long term?
While the outcome of this report is extremely skeptical, we see some growth coming in the back half of this year. The reason we are forecasting for this growth to occur is because the global semiconductor shortage should start to wane then! If you haven't been paying attention, the world has been at a supply semi-conductor constraint for some time now. With the global supply chain being stunted, this is something companies like MCHP have been hit hard with. With an end finally in sight, we believe this will help seed future growth sooner rather than later!
In addition to the macro pressures being alleviated, we forecast for MCHP to have sustainable growth for the years ahead. The reason for this is because their revenue growth does not fall victim to a lot of the macro pressures their competitors face. In particular their revenue growth is more predictable because MCHP recently changed their cancellation terms with customers from 45 days prior to shipment to 90 days. This small change will pay massive dividends in the form of allowing customers to have an increase in cancellation time. This allows MCHP to plan more properly should customers decide they do not want to pay. While it gives their customers more flexibility, it ultimately will be a net win for MCHP.
So while we are skeptical of the earnings call, given the macro headwinds, we do believe MCHP will guide investors higher with their outlook for the latter half of this year and beyond. With the higher guidance and sustainable growth baked in, we forecast them to be able to drive valuation expansion. This should lead to some outperformance for them in the foreseeable future. While we are aware they have been underperforming to date, we do believe the upcoming growth initiatives, global headwinds abating and other key growth initiatives should jumpstart the stock soon!
Price Target: $175 (21% upside)
Target Date: 6-12 Months