Morningstar | Microchip Should Outlast the Latest Round of Trade Tensions; Maintain $112 FVE, Shares Undervalued
Microchip is a leading supplier of microcontrollers, or MCUs, which are semiconductors that act as the brains within a wide variety of common electronic devices, from garage door openers to electric razors and all types of products in between. We view Microchip as one of the best-run firms within the chip space and especially like the firm’s focus on higher-margin chip opportunities across a wide array of end markets.MCUs essentially recognize inputs, execute a program, and send an output. MCUs are often accompanied by analog chips that process real-world inputs such as temperature and pressure, so that, for example, a thermostat can recognize the current temperature and tell the MCU so that it can decide to turn the heating unit on or off.The businesses of MCUs and analog chips have many desirable features. Neither type of chip is overly dependent on leading-edge designs, so capital investments tend to be relatively low. These chips are selected based on performance rather than price, because they make up only a tiny portion of a product's overall cost. Customers tend to be loyal, and chips have long product lives because switching to a competing MCU could involve redesigning the entire end product. Thus, MCU and analog firms are able to maintain high margins and returns on invested capital. Microchip's historical strength has been the 8-bit MCU segment. These chips tend to be used in a wide range of simpler electronic products, and as a result, Microchip benefits by not being overly exposed to a single technology segment or customer. Microchip faces more competition in the more advanced 16- and 32-bit MCUs, but the firm has been gaining ground in recent years, and the firm’s analog chip business has grown at a nice pace both organically and as the firm makes bolt-on acquisitions.Overall, we foresee healthy demand for Microchip’s products going forward. As more and more electronic devices become "smarter" and connected to the Internet, Microchip’s MCUs and analog chips stand to benefit. Microchip will likely continue to make acquisitions in order to further expand its product portfolio.Microchip Technology develops, manufactures and sells semiconductor products. The company's product portfolio comprises general purpose and other eight-bit, 16-bit, 32-bit microcontrollers, 32-bit microprocessors, field-programmable gate array products, a range of linear, mixed-signal, power management, thermal management, discrete diodes, Metal Oxide Semiconductor Field Effect Transistors, radio frequency, timing, timing systems, safety, security, wired connectivity and wireless connectivity devices, serial Electrically Erasable Programmable Read Only Memory, Serial Flash memories, Parallel Flash memories, Serial Electrically Erasable Random Access Memory and serial Static Random Access Memory.
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