Did Microchip Technology Kill Any Chance Of A Tech Rally?

Microchip Technology Inc. MCHP shares are getting crushed this morning, down more than 12% after the semiconductor company cut its revenue guidance last night. The company said it expects first quarter sales to be down 1.5%, as opposed to its prior view of up 1%-6%. It also cut earnings expectations, saying it now expects earnings to come in at 53-54 cents per share, down from the prior view of 58-62 cents. Wall Street analysts had been expecting 60 cents per share. As such, shares of Microchip Technology are off 12% this morning, and the other chipmakers are down as well. What is really troubling is the comments that CEO Steve Sanghi said in the press release. Sanghi said, "Our net sales activity in the June quarter did not progress as we originally expected. We are seeing broad-based weakness in our business due to a number of factors. In the June quarter, our automotive business was down significantly from the March 2011 quarter due to lower automotive production activities including supply issues from other manufacturers associated with the earthquake in Japan. We also believe that some of the revenue upside that we saw in the March 2011 quarter was the result of customers being cautious and accelerating purchasing activities to minimize supply chain disruptions. Therefore, we believe we were also impacted by the correction of that inventory in the June 2011 quarter. Additionally, our consumer business was soft due to poorer global economic conditions including high unemployment, high oil prices and the resulting low consumer confidence. The computing portion of our business was also lower than our expectations as we saw reduced purchases by multiple large customers in this sector." The company said that multiple sectors are seeing contraction in business, which is not good for tablets, smartphones, and personal computers. This is not positive news for consumer electronics, and the tech sector in general. This comes as worries about spending in the public sector continue to increase, and Europe is increasingly proving to be a major issue for tech spending. The warning was echoed by the Novellus Systems NVLS earnings call yesterday, which basically said that if you are not Apple AAPL, you are doing terrible. Companies related to Apple like ARM Holdings ARMH, OmniVision Technologies, Inc. OVTI, and Qualcomm QCOM should not suffer as much as others due to their relationships with Apple, but these companies could still take a hit based on what Microchip and Novellus had to say. Our gross margin in the June quarter is expected to be about 58.4% to 58.8% on GAAP basis and 59.3% to 59.7% on non-GAAP basis and remain in that range in the September quarter. Our long-term target for non-GAAP gross margin remains in the 61% to 62% range. Our operating expenses for the June and September quarters are expected to remain in the range of 24% to 26% of net sales, in line with our long-term model that we have communicated to investors,” said Sanghi. The NASDAQ is down the largest of the three indexes today, down almost 0.5%, and it fell 2% yesterday, the largest drop of any indexes. The NASDAQ is incredibly tech heavy, and if names like Microchip and Novellus are saying that things are bad, then there is not much hope for anyone outside of Apple either. Even if you are an Intel INTC, things are bleak right now. Microchip Technology shares have rose 27% over the past 52 weeks, compared to the S&P 500's climb of 22.3%. With today's drop, shares have become a lot more attractively priced, but investors may want to stay on the sidelines until the company is more positive on the sectors outlook. ACTION ITEMS:

Bullish:
Traders who believe that the blip Microchip Technology is experiencing is temporary might want to consider the following trades:

• Go long MCHP at these levels, as it is very cheap, trading at 12 times forward earnings, and sports a 3.7% dividend yield as well.

Bearish:
Traders who believe that the semiconductor industry is going to experience a long down-turn may consider an alternate positions:

• Short anything semiconductor related, including Intel, ARM Holdings, CEVA CEVA and other names.

• Traders can also short the semiconductor ETF, Semiconductor HOLDRs ETF SMH, which holds a wide array of semiconductor stocks.

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