Everyone knows about microchip technology, but few know about Microchip Technology (NASDAQ:MCHP). MCHP stock has come back from a March market meltdown to hit higher highs.
MCHP makes controllers. For years these were hidden inside hard disk drives. Now they’re behind the scenes everywhere, controlling your WiFi, managing power, acting as interfaces.
You don’t see these products. They’re component parts of other products. But it’s a pretty good business, with the Phoenix-area company producing $5.3 billion worth last year.
It’s not a sexy business and it’s not always fast-growing. Microchip depends on other product manufacturers to buy its stuff. Sales for the 2020 fiscal year, ending in March, were lower than for 2019. They will likely be lower still this year.
Yet to read the financial press, MCHP is a hot stock. It deserves a look, although not for that reason. Come inside and I will tell the tale.
Why MCHP Stock is Hot
MCHP is a hot stock for two reasons.
First, it was hit hard by the pandemic. The value of shares was cut in half. It’s only now getting back to those highs, more than doubling from $55.77 on March 16 to Tuesday’s $112.35 close.
Second, management has done a good job massaging expectations. The company has beaten earnings estimates for the last three quarters. It should do so again when it reports Nov. 3. Expectations are for $1.26 billion in revenue and earnings of $1.27 a share.
MCHP has plants around the western U.S. but it does a lot of its testing and final assembly work in the Asia. That’s where the devices using its products are made. Its business model, in other words, is built on free trade. As a result, it hasn’t been growing much since the $1.4 billion spurt that came with the 2018 acquisition of Microsemi for $10.3 billion. This came just two years after it bought Atmel for $3.4 billion.
Microchip, in other words, is a roll-up of companies and products behind the scenes in the technology that runs our lives. Component companies don’t make headlines. They just make money.
Firm Focus on the Machine Internet
While MCHP is fully valued based on its current book of business, it deserves a second look from long-term investors.
That’s because its product line has put it directly into the crosshairs of what I call the Machine Internet. This was formerly called the Internet of Things. I identified it last year as a key trend for the coming decade.
“The more we can separate people from control over the machines, except in emergencies, the more powerful this technology becomes,” I wrote last year. “You keep from running people over by using the same sensor technology that waters the lawn to check whether there are kids on it.”
This isn’t going to all happen at once. Cars aren’t going to suddenly become autonomous. Instead, they’ll add features, as will the road system. Houses aren’t going to suddenly become autonomous. There will just be more ceiling fans, heating systems, stoves and entertainment devices supporting Alexa every year. Your fitness band will give you better alerts in emergencies, and eventually become a health monitor.
It’s like the cloud. You didn’t notice it in 2010. Now it’s embedded in your life. MCHP will make the cloud into the fog, offering interactivity you don’t even notice.
The current market has made MCHP too pricey for traders. It sports a price to earnings ratio of 43. The once-generous dividend of $1.47 a year now yields just 1.34%.
Instead, look at this as a decade-long play. The Machine Internet is coming. The cloud is becoming a fog that surrounds you and your life, in a good way. Each time it touches you, a Microchip product, or three, will be helping in the background. It adds up.
Get rich, slowly.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.