Microchip Technology stock (NASDAQ: MCHP) is down around 5% since the beginning of this year, but at the current price of around $98 per share, we believe that Microchip stock could see more downside.
Why is that? Our belief stems from the fact that MCHP stock has jumped 1.4x from the low seen at the end of 2018, around 1.5 years ago. Our dashboard What Factors Drove 39% Change In Microchip Technology Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.
Microchip Technology is a manufacturer of microcontroller and analog integrated circuits used in a wide variety of semiconductor applications. The stock rise over the past year and a half came due to a 32% growth in revenue, which despite a 2% rise in the outstanding share count, led to a 29% jump in revenue per share.
Microchip’s P/S ratio rose from 4.1x in 2018 to 4.6x in 2019, but has since dropped to 4.4x currently. Further, given the volatility of the current situation, there is significant possible downside risk for Microchip’s multiple, especially when compared with previous years: 4x in 2015, and 4.1x as recently as late 2018.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus has meant there is much lower demand for computing and hardware devices across all markets, which has driven down demand for MCHP’s products. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. This is evident from Microchip’s Q1 ’21 results in August, where revenue came in at $1.3 billion, down marginally from $1.32 billion. We expect revenue growth to stay stagnant in the medium term, and we believe MCHP’s Q2 ’21 results in October will confirm this.
Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/S multiple decline from the current level of 4.4x to around 4x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $85.
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