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Finance

Is Microchip Technology a Great Growth Stock to Own in 2021?

The semiconductor industry has proved its resiliency in the face of economic weakness stemming from the negative effects of the COVID-19 pandemic.  Companies in this space have capitalized on the pandemic, which has increased individuals’ and corporations’ dependence on tech devices that require microchips to operate.

Microchip Technology Incorporated (MCHP), a leading provider of smart, connected and secure embedded control solutions, has also benefited immensely from this tech boom. The company’s solutions serve more than 113,000 customers across the automotive, consumer, aerospace and defense, communications and computing industries.

Click here to checkout our Semiconductor Industry Report for 2021

The stock has returned nearly 52% over the past year, significantly outperforming the S&P 500’s 25.5% gains.

Let me detail why MCHP could prove to be  a solid growth investment:

Hefty Product Pipeline

MCHP is a leading provider of microcontroller, mixed-signal, analog chips, security and Flash-IP solutions, among other  products. The company is innovating quickly to offer a broad array of diversified products catering to a wide range of industrial applications. For example, as reliance on communication and weather satellites grows and space research expands in scope and mission, new technology is required. MCHP has recently expanded its SA50-120 power converter family with nine new units based on its Commercial Off-the-Shelf (COTS) technology to help speed spaceflight system design and production. Furthermore, earlier this month, MCHP unveiled the first hardware-based audio endpoint solution for Vehicle Ethernet Audio Video Bridging (AVB).

Accelerating Global Demand

Major economies around the world saw  businesses return to growth in the previous quarter. In words of CEO Ganash Moorthy, “During the December quarter, a robust overall business environment, accentuated by rising demand in the automotive, industrial and consumer end market, along with low levels of inventory in the distribution channel, resulted in supply constraints in practically all of our internal and external factories.” In fact, the demand is apparently so overwhelming that management has implemented a first-ever Preferred Supply Program (PSP) for customers. The PSP allows customers to get prioritized capacity, if they book 12 months of orders that are non-cancelable and non-refundable.

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Solid Financial Performance

In its fiscal third quarter, ended December 31, 2020, MCHP reported net sales of $1.35 billion, an increase of 5% year-over-year. This represents  3.3% sequential growth, as recovery in the global business environment as well as recovery in demand across automotive, industrial and consumer end-markets were positive. However, the Huawei ban negatively impacted the company’s data center business. Microcontroller business contributed 53.7% to its top-line, rising nearly 6% year-over-year. Its adjusted EPS came in at $1.62, surging 22.7% compared to the year-ago value of $1.32.

Favorable Analyst Sentiment

Analysts expect MCHP’s revenue to increase 9.6% in its fourth quarter and 2.9% for the full year (ending March 31, 2021). Its EPS is expected to improve 19.2% and 15.1%, respectively, in the current quarter and current year Moreover, the company’s EPS is expected to grow at a rate of 11.8% per annum over the next five years.

Of the 23 Wall Street analysts that rated the stock, 19 have given it either a Strong Buy or a Buy rating. Analysts expect the stock to hit $170.05 in the near term, which indicates a potential upside of nearly 15%.

POWR Ratings Show Odds are in Favor  

MCHP has an overall rating of B, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system evaluates each stock based on eight different categories. Among  these categories, MCHP has a Growth Grade of A. Over the past three years, the company has grown its revenue and EPS at CAGRs of 10.9% and 7.7%, respectively.

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MCHP has a Momentum Grade of B, in sync with its strong price performance. Moreover, the stock has a Sentiment Grade of B, reflecting greater analyst confidence. In the B-rated Semiconductor & Wireless Chip industry, MCHP is ranked #14 of 60 stocks.

Beyond what we stated above, we also have given MCHP grades for Value, Stability and Quality. Get all the MCHP ratings here.

Better than Microchip Technology: Click here to learn about other top-rated semiconductor & wireless related stocks

Bottom Line

The global semiconductor market is all set to witness robust, decade-long growth due to the fast-paced progress on technologies such as artificial intelligence, machine learning, 5G, cloud computing, IoT and autonomous driving. In line with new digital applications and a robust economic recovery, MCHP have been innovating its product line by new microcontroller rollouts and expanding its manufacturing facilities to meet the surging demand.

Strong results over the past few quarters reflect MCHP’s expanding trends and the achievement of greater share in all end markets. The company is aggressively reducing its debt while also maintaining its dividend payments. In fact, MCHP has paid down a cumulative debt of $3.24 billion over the past 10 quarters, while actively managing the businesses’ working capital requirements. Hence, we believe, MCHP is well-positioned to capitalize on the need for powerful, energy-efficient microchips.

Click here to checkout our Semiconductor Industry Report for 2021

Want More Great Investing Ideas?

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MCHP shares were trading at $152.53 per share on Friday afternoon, up $4.81 (+3.26%). Year-to-date, MCHP has gained 10.72%, versus a 2.06% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More…

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