Over the last six months, Microchip Technology shares have sunk to $58.31, producing a disappointing 17.1% loss - worse than the S&P 500’s 2.2% drop. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Microchip Technology, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Microchip Technology Will Underperform?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why you should be careful with MCHP and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Microchip Technology struggled to consistently generate demand over the last five years as its sales dropped at a 3.6% annual rate. This was below our standards and is a sign of poor business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, Microchip Technology’s operating margin decreased by 11.6 percentage points over the last five years. Even though its historical margin was healthy, shareholders will want to see Microchip Technology become more profitable in the future. Its operating margin for the trailing 12 months was 6.7%.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Microchip Technology’s margin dropped by 16 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Microchip Technology’s free cash flow margin for the trailing 12 months was 17.5%.
Final Judgment
Microchip Technology doesn’t pass our quality test. After the recent drawdown, the stock trades at 51.5× forward P/E (or $58.31 per share). This multiple tells us a lot of good news is priced in - you can find better investment opportunities elsewhere. We’d recommend looking at one of our all-time favorite software stocks.
Stocks We Like More Than Microchip Technology
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