Microchip Technology Is Serving Fastest Growing Market In One Of The Hottest Sectors

Argus issued a positive opinion on Microchip Technology Inc. MCHP, premised on the continued operating momentum, favorable valuation and its addressable market, which is growing faster than the overall semiconductor industry.

As such, the firm initiated coverage of Microchip Technology with a Buy rating and a $106 price target.

Things Are Going Well For Microchip Tech

Analysts Jim Kelleher and TW Smith believe the company is benefiting from demand growth across the breadth of the global economy and from a broadening product line that addresses more markets in IoT, industrial, automotive, consumer, computing, communication, defense and other end markets.

The analysts made note of the company's calendar year second-quarter results, which revealed 50 percent, plus, year-over-year revenue growth, benefiting from favorable market conditions along with its Atmel acquisition that was completed in April 2016, and a record non-GAAP earnings per share. The company expects September revenues to exceed $1 billion for the first time, the analysts added.

Further Analyst Commentary

Argus noted that the company has expanded from its original offering of microcontroller, analog and memory products for embedded control systems, thanks to its over 15 niche acquisitions as well as the Atmel deal.

The firm said the company now offers complementary products used in the same circuits for handling heat, power, connectivity, security and other factors, while at the same time moving to third place in microcontroller market share. The firm sees the company's addition of capacity to reduce lengthening lead times as suggesting strong demand for at least 12 months.

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"With larger operations, customer lists, product offerings, and production facilities following a string of acquisitions over the past decade, Microchip appears to be shifting to a higher level of earnings performance, with the consensus anticipating 30%-plus growth for fiscal 2018," the firm said.

Even as the firm thinks a general economic slowdown could pose a cyclical threat to the company's sales, it is of the view that orders currently are in very good shape. The firm sees opportunities for margin improvement, while at the same time believing that valuation is attractive.

On valuation, the firm noted that Microchip Technology shares are up 41 percent year to date compared to the 27 percent gain of the semiconductor peers it covers and the 30 percent gain of the PHLX Semiconductor index. Also, the firm said the strong gains came on the back of a 42 percent jump in 2016.