EUR 850.00 For Business Accounts Only

Morningstar | Maxim Appears Poised to Weather the Latest Chip Industry Downturn; Maintain $55 FVE

Maxim Integrated reported disappointing fiscal second-quarter results and provided investors with a downbeat forecast on almost every metric due to a soft macroeconomic environment that has weighed on the firm's business in industrial and data centers in particular. The gloomy outlook is not especially surprising, however, and we still believe that Maxim is well positioned to prosper from rising electronics content in a host of industrial, Internet of Things, and automotive devices. We see no signs of the electrification of the car slowing down, even if end market demand for cars is weak in the near term. We will maintain our $55 fair value estimate for wide-moat Maxim. We view shares as fairly valued and would point investors toward names with a wider margin of safety today like Microchip and STMicro.

Revenue in the December quarter was $577 million, down 10% sequentially, down 7% year over year and toward the low end of the firm's previous guidance of $570 million-$610 million as discussed in October. After adjusting for one-time items in the prior year, industrial chip revenue was down 6% year over year with sluggish demand across broad markets and in factory automation. Communication and data center revenue was down 13% year over year on an adjusted basis with very light demand for optical products sold into hyperscale data centers, a common theme in light of earnings warnings from Nvidia and others. Lower sales levels caused adjusted gross margins to fall 260 basis points sequentially to 66%, at the low end of prior guidance.

For the March quarter, Maxim expects revenue in the range of $520 million-$560 million, which, at the midpoint, would represent a 6% sequential decline and a 17% drop year-over-year. Although Maxim saw chip orders stabilize a bit in the month of January, the firm still expects weakness in optical products, core industrial chips and a normal seasonal decline in consumer chip sales.

Nonetheless, we still like Maxim's position across its end markets. We believe the firm, as well as its peers, benefit from customer switching costs as customers are hesitant to redesign their electrical boards and products in order to swap Maxim out for cheaper chips. We don't believe that Maxim is losing share across any of its end markets, but that the firm's customers have simply been cautious about their production plans for a host of macroeconomic reasons. Maxim has weathered these types of industry downturns before and we think they'll do so again. We're encouraged by the firm's focus on stock buybacks, as the company intends to return 125% of free cash flow to shareholders in fiscal 2019, well ahead of the company's 100% target.