Core Portfolio Insight: Microchip Technology (MCHP)

Core Portfolio Insight: Microchip Technology (MCHP)

June 17, 2022
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"Any product around the world, if there is power applied to it, either plugged-in or battery, then it uses a Microchip part." - Steve Sanghi. General Instrument spun off GI Microelectronics in 1987 into a new company called Microchip Technology. At the time, Microchip had about $60M of sales and annual losses of $10M. The company promoted Steve Sanghi to President in 1990. Under Sanghi's leadership, Microchip turned into a $34 billion market cap company today with 21,000 employees and $6.8 billion of sales in FY22. Microchip is on its 126th consecutive quarter of profitability (non-GAAP). [1] [2] [3] [4] [5] [6]

Microchip has an impressive, resilient track record. Despite numerous down cycles, Microchip has been able to generate industry-leading cash flow and profitability. Management presented the two charts above at its latest investor event. The charts show Microchip's free cash flow (FCF) and Gross Margin plotted with semiconductor sales percentage change over the last 15 years. Microchip has always proven to come out of industry slowdowns as a stronger company. [1]

The current environment is challenging. Pandemic lockdowns accompanied by large increases of demand led to a global shortage of semiconductors. CEO Ganesh Moorthy noted on the Q4 2022 earnings call, "Looking at the magnitude of the demand supply inbound, the size of our noncancelable backlog, the rate at which new backlog continues to come in, and the rate at which we're able to bring on new capacity, we expect that we will remain supply constrained throughout 2022 and into 2023. Our growth is predominantly limited by how quickly we can bring on additional capacity to support demand."

Microchip is seeing so much demand that its facilities cannot keep up. Management greatly increased capital expenditures, spending $492 million in FY22 compared to $182 million in FY21, according to FactSet, but are cautious on spending too much since semiconductor sales have historically been cyclical. Management does not want too much capacity in case there is another downturn. Even with record capex spend, Microchip recorded its highest free cash flow ever of $2.5 billion in FY22. 

Management is using this record free cash flow generation to pay down $5 billion of debt, pay out $1.6 billion of dividends, and repurchase $426 million worth of MCHP shares. [1] [2] [3] [4] [5] [6]


Growth opportunities for Microchip come from a combination of market megatrends and its Total System Solutions. Megatrends include 5G, Internet of Things, Data Center, Electric Vehicles, Artificial Intelligence & Machine Learning, and Advanced Driver Assistance Systems & Autonomous Vehicles. All these megatrends require power, whether plugged-in or battery. Total System Solutions is Microchip's portfolio of hardware, software, and services. Management has made numerous acquisitions to build out its portfolio. Since 2010, Microchip acquired SSTI for $177M, SMSC for $711M, SUPX for $224M, ISSC for $304M, MCRL for $830M, ATML for $3.5B, and MSCC for $10.2B. [1] [2] [3] [4] [5] [6]

Sources:

[1] Microchip Investor Presentation June 2022

[2] Microchip Press Release Dec. 14, 1987

[3] CEO interview: Microchip's Steve Sanghi

[4] Microchip Announces CEO Transition

[5] NYTimes - Chip Shortage Creates New Power Players´╗┐

[6] Microchip Investor Relations´╗┐

Disclosure:

This blog post or document contains information about a company that is owned in portfolios managed by GPM and is intended exclusively for GPM clients. While this company is owned in a broad cross section of GPM managed portfolios, it should not be implied or assumed that every client portfolio or account currently holds this stock. Data presented is from sources we believe to be reliable. The opinions and commentary presented reflect our best judgement at this time, and may include “forward-looking statements”, all of which are subject to change at any time without obligation to update them. Shares of this stock are NOT held in accounts that invest exclusively in ETFs or mutual funds. Actual future results may be different than our expectations. There can be no assurance that your investment objectives will be realized. Investing involves risk and losses can occur.