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Microchip Technology's 'Reasonable Valuation' Prompts Goldman Sachs Upgrade

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March 8, 2018 9:24 am
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Shares of Microchip Technology Inc. (NASDAQ:MCHP) have gained 30 percent over the past year, and Goldman Sachs sees the case for a further 13-percent upside for three key reasons.

The Analyst

Goldman Sachs' Mark Delaney upgraded Microchip Technology's stock rating from Neutral to Buy with a price target boosted from $94 to $108.

The Thesis

The bullish case for the semiconductor company's stock is threefold, Delaney said in the upgrade note.

  • The company's capital allocation strategy is now viewed positively, as the recently passed tax reform offers a new flexibility to repurchase stock in addition to seeking out M&A deals.
  • Microchip's stock is trading at a "reasonable valuation" at around 17x the next 12 months' non-GAAP Street EPS, which is merely in-line with the stock's historical median over the past five years, the analyst said. The stock's P/E multiple has expanded at a slower rate than its peers over the past year and should start catching up, as the company's record backlog should support top-line growth through at least the June quarter, Delaney said. 
  • Microchip Technology's exposure to the 8-bit MCU market was a prior concern, the analyst said. But a 2017 survey of over 1,200 engineers in the embedded industry by EETimes/Embedded.com found the number of engineers planning to adopt 8-bit MCUs increased after years of declining demand.

The analyst's new assumptions on Microchip Technology's stock do not factor in the pending acquisition of Microsemi Corporation (NASDAQ:MSCC) because a "range of outcomes exists beyond our scenario analysis," Delaney said. 

Price Action

Shares of Microchip Technology were up 1.8 percent in premarket trading Thursday. 

Related Links:

Microchip Technology Notches Upgrade After Microsemi Purchase

A Bidding War For Microsemi Is 'Unlikely,' KeyBanc Says

Photo courtesy of Microchip Technology.

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