Microchip Technology (MCHP): Strong Revenue Growth and Dividend Game

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Microchip Technology (MCHP) is a mid-growth semiconductor company with significant long-term growth opportunities. I expect the company’s revenue to grow at a high single-digit CAGR over the next five years, driven by growing demand for its FPGA and microcontroller products. The company will also be able to increase its dividend payout through sustained revenue growth and steady debt reduction. Demand for the company’s shares will increase significantly in the coming years due to its growth prospects, which will result in significant share price appreciation. Investors focused on long-term growth can buy Microchip shares during pullbacks to maximize their gain.

Microchip offers its customers embedded control systems composed mainly of microcontrollers. The company also offers easy-to-use development tools that allow its customers to create technologically advanced products. The company’s portfolio of semiconductor products is capable of reducing total system cost and time to market. The company serves the following end markets: industrial, data center and computing, automotive, communication, consumer, aerospace and defense.

Growth engines

FPGA Products

Microchip’s FPGA product family is its main driver of growth. The company’s FPGAs (Field Programmable Gate Arrays) help OEMs (Original Equipment Manufacturers) reduce system-level power consumption, make their products safer to use, and enhance the safety of their products. That’s why the company’s FPGAs outperform many of its competing products. Modern FPGAs are built with one advantage over ASICs (Application Specific Integrated Circuits) in mind, which is the flexibility related to design change and computational scope, even at a later stage of development. of the product. Due to this advantage, FPGAs will be preferred in an increasing number of industries in the coming years, which will be responsible for the growth of Microchip’s FPGA revenue in the coming years. This will drive the company’s overall revenue growth in the long run.

Microcontroller Products

Microchip offers a wide range of general purpose microcontroller products to its customers. The company’s family of microcontroller products is its other growth driver. These microcontroller products are enjoying high demand in the global microcontroller market as they are designed to provide extended functionality and superior performance characteristics over competing products. Additionally, Microchip’s microcontrollers cover a vast majority of applications, such as communications, computing, automotive, industrial, and power supplies, and as a result, the company has established itself as a leader in the microcontroller market. This is another reason for the high demand for the company’s microcontrollers. From a macro perspective, the growing demand for industrial automation, strong demand for IoT (Internet of Things) and the advent of smart grids are driving the global demand for microcontrollers, which is conducive to the increased growth of long-term revenues of Microchip.

Competetion

Microchip operates in a highly competitive industry with several competitors. Its competitors are Analog Devices (ADI), Infineon Technologies (OTCQX: IFNNY), ​​STMicroelectronics (STM), Xilinx (XLNX), ON Semiconductor (ON) and Silicon Laboratories (SLAB). Microchip competes with these players on the basis of product quality and performance, product usability, customer support and price.

Microchip’s main competitive advantage is that it offers its customers a total system solution (TSS), which is a combination of hardware, software and services. TSS helps the company’s customers increase revenue, reduce costs and better manage risk compared to competing solutions, which in turn ensures that the company’s long-term revenue growth remains sustainable. The other competitive advantage of the company is that it is able to offer synergistic products (ensuring an increasing demand for the products) to its customers in the fields of AI (artificial intelligence) and machine learning. , data centers, IoT, 5G communications and ADAS (advanced driver assistance systems), which allows them to significantly reduce their costs, which translates into strong growth in the results of their respective activities. Many of these areas are new to the semiconductor industry with immense growth opportunities for Microchip.

Results for the second quarter of fiscal 2022

Microchip had net revenue of $1.65 billion in the second quarter of fiscal 2022, up 5% sequentially and 26% year-on-year. The company’s non-GAAP net income was $605.6 million, up 45% year-over-year. The company’s operating cash flow was $611.7 million and free cash flow was $533.2 million. The company repaid $415.6 million in debt during the quarter.

The company recorded excellent growth in turnover and net profit. Revenue increased due to growth in microcontroller and analog revenue. Microcontroller revenue increased 27.1% year over year, and analog revenue increased 35.8% year over year. Net income increased due to scale and acquisition synergies. The company pays regular dividends, which is another reason I like Microchip stock, aside from revenue growth. In the second quarter of fiscal 2022, Microchip paid a record quarterly dividend of 23.2 cents per share, up 6.2% sequentially and 25.9% year-on-year. I expect the company to continue paying growing dividends thanks to continued market share gains in the microcontroller and analog businesses. In addition, the company’s broad exposure to the automotive and industrial markets will allow it to increase its dividends in the years to come thanks to strong cash generation. Continued debt reduction will also fuel dividend payout growth.

Microchip acquired a small, early-stage semiconductor player based in Ireland during the quarter, known as Iconic RF. Iconic RF manufactures ICs (Integrated Circuits) primarily for the Aerospace and Defense market. The acquisition will help Microchip diversify its product offerings for this market, which in turn will drive long-term revenue growth for the company.

Evaluation

Microchip’s peer group companies include Analog Devices, Infineon Technologies, STMicroelectronics, ON Semiconductor and Silicon Laboratories. Microchip’s non-GAAP (FY1) forward P/E multiple is 19.64x, compared to 23.33x from Analog Devices, 24.97x from Infineon Technologies, 24.38x from STMicroelectronics, 24.21x from ON Semiconductor and 105.21x from Silicon Laboratories. Microchip’s 12-month sales price is 7.82x, compared to 9.55x for Analog Devices, 4.69x for Infineon Technologies, 3.60x for STMicroelectronics, 4.51x for ON Semiconductor and 8.80x for Silicon Laboratories. The price for the last 12 months against Microchip’s cash flow is 21.95x, against 33.76x for Analog Devices, 16.91x for Infineon Technologies, 14.47x for STMicroelectronics, 18.81x for ON Semiconductor and 50, 73x for Silicon Laboratories (Data source: Seeking Alpha).

Microchip is quite valued compared to companies in its peer group. However, the company is heavily leveraged with $8.24 billion in debt and $255.30 million in cash on the balance sheet. The company’s net leverage ratio is 3.22x, which is a bit worrying. The good news is that the company is paying off its debt quickly. The company’s microcontrollers and FPGA products are enjoying strong market demand, which is why the company is not cheaply valued despite its leverage. According to company sources. This indicates that the company is not only capable of significantly reducing its debt over the next three to five years, but also of paying dividends at an increasing rate over the long term. The company’s acquisition of Microsemi in 2018 significantly strengthened its data center, communications, defense and aerospace businesses, which will continue to drive revenue growth in the years to come. The company’s revenue has grown at a CAGR of around 12% over the past five years, and I expect revenue to grow at a CAGR of around high single digits over the next five years. I’m optimistic about the long-term business.

Assuming that Microchip’s revenue will grow at a CAGR of approximately 9% over the next five years, I’ll find out the company’s long-term share price. The company’s last 12 months revenue is $6,038.40 million and, at a CAGR of 9%, its early 2027 revenue will be $9,290.00 million, or 16 $.74 per share. Over the past five years, the company’s shares have traded between price and sell multiples of 3x and 8x. I expect the company’s price to sales to increase over the next five years, due to growing demand for its stock, which will push the multiple to around 10x. Applying a price-to-sell multiple of 10x on Microchip’s earnings per share at the start of 2027, I get $167.40 as the company’s share price at the start of 2027.

Risks

The company’s main risk factor is its indebtedness. The company acquired a significant portion of its debt when it acquired Microsemi in 2018. However, the company is constantly paying down its debt and generating growing cash flow, which is why the company is becoming an attractive investment opportunity in long term. players. The Company’s current credit ratings are favorable to investors. Any downgrade in the company’s current credit ratings could lead to higher borrowing costs and, as a result, its share price could decline.

The fabrication of non-volatile and erasable CMOS memories and logic devices is a complex process, which is sensitive to a variety of external factors. These factors mainly include contaminants in the manufacturing environment and impurities in the materials used. These factors have a direct impact on manufacturing yields. If the company fails to maintain yields around the current level, its operating results could suffer.

Conclusion

Microchip is an attractive growth and income story for long-term investors. Its turnover and EBITDA have been growing steadily for the past ten years. Growing demand for embedded control systems is driving the company’s revenue growth. The company’s FPGAs are enjoying strong demand in the market as the products are manufactured using low-power and non-volatile technology compared to traditional SRAM-based devices. Long-term investors can buy Microchip shares using appropriate withdrawals.