Microchip Shares Upgraded To Buy Amid Tight Supply In Semis Sector

“Our recent channel checks have indicated that overall semiconductor supply remains tight, resulting in extended lead times (from 15 weeks to 24 weeks) for some products including automotive while prices have remained stable,” Summit Redstone’s Lena Zhang said in a note.

The analyst upgraded the rating on Microchip Technology Inc. MCHP from Hold to Buy, while raising the price target to $82.

Benefits

Zhang mentioned that the tight supply in the semiconductor sector favored Microchip Technology increasing prices on Atmel Corporation ATML's products.

The company has increased prices for Atmel’s products during mid-2016, following which some customers switched to other suppliers. Due to this, the analyst stated that concerns regarding “business loss loss in the automotive and industrial applications have certainly eased.”

Gross Margin Expansion

Zhang pointed out that Microchip Technology manages several large accounts directly, rather than through distributors, which the company had taken back from distributors in the process of integrating Atmel’s businesses.

“Accordingly, Microchip reported that distributor sales accounted for 52.6 percent of total revenue in the December quarter, down from 56 percent in the June quarter,” the analyst said.

Zhang believes that this could have driven gross margin expansion for the company over the last two quarters.

The analyst also noted that Microchip Technology had narrowed its revenue and non-GAAP guidance, although the midpoints had been left unchanged.

“As our checks indicate with no major business loss in the automotive and industrial end market, we remain upbeat on Microchip prospects for FY2018 and beyond,” Zhang added.

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