With most semiconductor stocks expected to post profits at the end of the month, investors are already bracing for poor results. Still, there are some companies in the space whose strong order books and momentum put them in a better position. Two of these names are Microchip Technology Inc. (NASDAQ: MCHP) and monolithic power systems (NASDAQ: MPWR), which also appear to be of relatively reasonable value. I am bullish on both stocks.
Although semiconductors are essential components of any electronic device, the demand for electronic devices is cyclical. Thus, the semiconductor industry is also quite cyclical. In favorable market environments, high demand for semiconductors leads to supply shortages. Naturally, this leads to tight supply and high prices, which are usually followed by stockpiling and falling prices during bad economic times. For this reason, semiconductor stocks are particularly known for their cyclical nature.
Undoubtedly, the market is not in its best shape right now, and with the ongoing macroeconomic turmoil putting pressure on consumer spending and business investment spending, demand for semiconductors is entering into a down cycle.
Advanced micro-systems (NASDAQ: AMD), whose performance can work as an indicator for the industry due to its importance in the market, released its preliminary results last Friday. The company massively disappointed investors as its numbers were well below consensus estimates, causing its shares to fall further.
Nonetheless, as mentioned above, MCHP and MPWR are well positioned to navigate current market conditions. Let’s examine why.
Strong order books and momentum to generate revenue
MCHP and MPWR are enjoying strong backlog and momentum, respectively, which should result in a “soft landing” if not continued growth going forward. I find these to be strong traits in the semiconductor space right now.
Latest MCHP results showed strong growth
The latest results from the MCHP have demonstrated this. In its results for the first quarter of fiscal 2023, the company reported record net revenue of $1.96 billion, up 25.1% from the comparable period last year. Revenue also increased 6.5% sequentially, reflecting its strong momentum.
In the earnings report, MCHP CEO Mr. Moorthy mentioned that the company ended the quarter with its highest ever unsupported backlog, with more than 50% of that backlog non-cancellable under MCHP’s Preferred Supply Program (PSP).
He also pointed out that due to MCHP’s unsupported backlog well ahead of the actual revenues the company achieved in the first quarter, management believes that MCHP is well positioned to continue to propel revenue growth. and profitability. The key word here is “incremental” because it doesn’t just imply positive year-over-year growth, but actually sequential revenue growth on top of record fiscal first quarter numbers.
MPWR’s latest results were also strong
The latest MPWR results also highlighted robust growth momentum in the second quarter of the fiscal year, and based on management’s forecast, the momentum will persist going forward. Quarterly revenue increased 57.2% year-over-year to $461 million, driven by the company’s diversified growth strategy, technology innovation and market share gains at large scale.
Impressively, Storage and Computing revenue soared 112% to $122.3 million, while Enterprise Data revenue jumped to $65.2 million, a gain of 118% compared to the period of the previous year. The rest of its segments also recorded exceptionally high growth rates.
However, since we are primarily interested in the prospective growth of the business, management expects third quarter revenue to be between $480 million and $500 million. This implies year-over-year growth of 51.7% at the midpoint, implying little to no slowdown in second-quarter revenue growth.
Is MCHP Stock a Buy, Analysts Say?
On Wall Street, Microchip Technology has a Moderate Buy Consensus Rating based on nine buys and five takes over the past three months. At $84.77, the average stock forecast for MCHP implies an upside potential of around 32.8%.
Is MPWR stock a buy, analysts say?
When it comes to Wall Street, the MPWR has a consensus Strong Buy rating based on nine buys and one hold awarded over the past three months. At $566.90, the average stock forecast MPWR implies an upside potential of around 64.6%.
Are the MCHP and MPWR reasonably rated?
While MCHP and MPWR are expected to see strong revenue growth this year, they are also expected to increase their net income quite substantially. MPWR is expected to increase adjusted EPS nearly 69% to $12.58. MCHP is expected to increase adjusted EPS nearly 23% to $5.66. These numbers imply that the shares are trading at forward P/E ratios of 27.4x and 10.8x, respectively. The higher MPWR multiple likely reflects the company’s more explosive growth rates. Overall, I would say that considering the forward expectations of both companies, both stocks look reasonably priced.
MCHP likely offers a higher margin of safety due to its more modest valuation multiple and greater cash flow visibility within its order book.
I strongly suggest that potential investors regularly review MCHP’s and MPWR’s stock-based compensation expenses, as they are nonetheless often high. It’s common in the industry to retain talent, but it can seriously dilute long-term investors. For context, MCHP and MPWR stock counts have increased 34.8% and 31.9% over the past decade. Constant dilution, in turn, means that current valuation multiples could be somewhat distorted.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.