Macro Headwinds Send Microchip Technology Stock to the Buy Zone

Key Points

• Microchip Technology has headwinds in 2024 that will revert to tailwinds in 2025 as a multi-year upcycle in mixed-signal devices begins. 
• The company's Q2 results are tepid but sufficient to sustain its financial health and capital return until the business improves. 
• The stock price has fallen to a critical support level near a long-term uptrend trend and is likely to rebound soon. 

Microchip Technology Incorporated NASDAQ: MCHP has the power to withstand its headwinds in 2024 and sustain the uptrend in its share price. The uptrend, begun in 20216, has increased the stock’s value by 300%, including the 2024 price correction, and another 300% upside is coming for those prepared to wait. Not only are the company’s mixed-signal semiconductor products critical to technology, but a rebound in demand is coming in 2025 that will be the beginning of a multi-year upcycle. 

2024’s headwinds include a massive inventory correction resulting from COVID-related supply chain issues that will soon pass. OEMs overstocked many components in 2022 and 2023, trying to front-run supply chain issues.

2025’s tailwinds will include normalized demand patterns from OEMs, falling interest rates, and improving demand across consumer end-markets as interest rates fall. End markets range from automotive to mobile, personal computing, the IoT, and every industry that relies on uninterrupted communication between components and devices. 

Microchip Technology Sustains Financial Health Despite Headwinds

Microchip Technology's FQ2 2025 revenue is slightly better than expected compared to the consensus reported by MarketBeat, but not good. It is down 48.4% yearly to $1.16 billion, a nearly decade-low. The decline is due to sluggishness in most end markets, with automotive singled out by management as the weakest link. Strengths were seen in the data center business, which is expected to drive growth in 2025 but is insufficient to offset the broader weaknesses. 

The margin news is also mixed, coming in better than expected despite a significant decline compared to last year. The critical detail is that the net income of $250 is insufficient to generate positive cash flow for the quarter but sufficient to sustain the company’s financial health until the business rebound begins.  That’s a critical detail because the company has maintained solid cash flow growth throughout market cycles and a robust capital return. 

The guidance isn’t favorable, with Q3 results expected below the analysts' consensus, but the business bottom may be near. Management noted “green shoots” in prior quarters' reports and said they are advancing, if unevenly, including increased expedited orders, which point to improving end-market demand. With the FOMC on track to cut its base rate to 4% or lower by mid-year 2025 and end-market inventory normalization well underway, the bottom for business may indeed be in. A rebound could begin in early 2025 and gain momentum as the year progresses. Analysts forecast a 20% revenue and 70% earnings rebound in 2025. 

Microchip Technology's Strong Balance Sheet Sustains Distribution Growth

Microchip Technology faces headwinds in 2024 but remains strong enough to sustain and grow its capital return, increasing the dividend distribution by 3.6% for Q3. The increase is down from prior years, slowing along with the business, but expected to sustain in 2025, keeping the stock on track for inclusion in the Dividend Aristocrats later this decade. 

Due to the stock price correction this year, the dividend yield is at the high end of the historical range, running near 2.5%, but there is a red flag. The payout in 2024 is more than earnings, which raises the question of sustainability. If business does not improve, a dividend cut is likely. Until then, the balance sheet remains in fortress condition with long-term debt less than 1x equity and 0.28x assets. 

The Technical Outlook: MCH Stock Returns to Trend

The price action in MCHP stock corrected more than 20% from the 2024 peaks as the pandemic-driven bubble burst. Now, with inventory normalization underway and the stock price corrected from the COVID bubble, the stock price aligns with long-term trends where support is likely strong. The trend line has produced numerous rebounds since 2016, each resulting in new highs for the stock. A move to new highs is worth 40% in upside, not counting the dividend and share repurchases, which also support the stock’s price.