MCHP Stock: The Chip Maker for the Cloud Floats Higher

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Microchip Stock to Shine in the Connected World

One of my favorite methods of investing is picking up stocks that dominate in their space and cater to a fast-growing technology trend. This is called “picks and shovels” investing. With these growth stocks, investors have a good chance to make above-average returns.

Such companies provide products and solutions for the current trends. One of the most important technology trends of today is the rise of smart devices and networks connected through the cloud. Given the right tools and offerings, players in this space have lot of room to grow and prosper.

One such company is Microchip Technology Inc. (NASDAQ:MCHP), which builds specialized products for a wide variety of embedded control applications. In this age of flexibility and agility, manufacturers use integrated circuit-based embedded control systems to build cutting-edge products—faster and at lower costs.

Such systems are used in thousands of products and subassemblies in a wide variety of applications that include automotive comfort, safety, information, entertainment, remote control devices, handheld tools, home appliances, and robotics.

These embedded control systems incorporate microcontrollers, which are basically self-contained computers on a chip. Microchip Technology builds and sells a huge number of these microcontrollers.

As the demand for embedded control has increased with the rise of cloud-connected devices, the market for microcontrollers has become one of the most significant segments of the semiconductor market and is worth billions of dollars, which bodes well for MCHP stock.

According to a forecast by research company Gartner Inc, 8.4 billion connected products will be in use around the world this year, which is up 31% from 2016. Gartner predicts that this number will reach 20.4 billion by 2020. By the end of 2017, total spending on endpoints and services are expected to rise to almost $2.0 trillion. (Source: “Gartner Says 8.4 Billion Connected “Things” Will Be in Use in 2017, Up 31 Percent From 2016,” Gartner Inc, February 7, 2017.)

More connected devices translate into more demand for the chips inside. Microchip Technology’s broad spectrum of products are aimed at thousands of applications worldwide. They fulfill the growing demand for high-performance designs in the automotive, communications, computing, consumer, and industrial control markets.

These connected designs are the foundation of future smart societies. As cloud-connected systems become increasingly important across a large number of industries, Microchip stock should continue to move higher.   

Just yesterday, the company announced that it has expanded a collaboration with Amazon.com, Inc.’s (NASDAQ:AMZN) “Amazon Web Services” (AWS). The partnership will support cloud-connected embedded systems, which would enable the creation of smart designs. Microchip Technology will provide all the software, tools, components, and support needed to rapidly develop secure cloud-connected systems. (Source: “Create Cloud-Connected Embedded Systems with Microchip Technology and Amazon Web Services’ Expanded Offerings,” Microchip Technology Inc, November 29, 2017.)  

As the process of connecting devices and platforms to the cloud accelerates, players like Microchip Technology should continue to gain, boosting MCHP stock.

The chip maker reported second-quarter results this month and announced record net sales and earnings. Generally accepted accounting principles (GAAP) net sales were a little over $1.0 billion, which is an increase of 16.2% year-over-year. Adjusted earnings were $1.41, as compared to $0.94 in last year’s second fiscal quarter. (Source: “Microchip Technology Announces Record Net Sales and Earnings for Second Quarter of Fiscal Year 2018,” Microchip Technology Inc., November 6, 2017.) 

The microcontroller business performed very strongly in the September quarter, with revenue being up 4.7% sequentially, which was a new record.

CEO Steve Sanghi stated that the company was making “outstanding progress in moving towards [its] long-term operating model.” He further said, “Our organic growth continues to thrive with our Microchip 2.0 initiative,” which allows the company to “provide Total System Solutions to [its] customers by selling multiple solutions into the circuit boards that drive their end applications.” (Source: Ibid.)

Driven by the impressive business growth, Microchip stock has gone up by over 160% in the last five years, and almost 40% in the last year.

microchip stock chart

Chart courtesy of StockCharts.com

Analyst Take:

With a broad portfolio of general purpose and specialized microcontrollers, wired connectivity, and wireless connectivity devices—as well as Flash memory products and more—Microchip Technology offers a complete embedded ecosystem in the industry.

As our gadgets and machines get more connected, it is likely that many of them will have parts built by Microchip Technology. Microchip stock is a “picks and shovels” stock that could gain consistently from this trend.