Key Takeaways
- Microchip Technology’s recent share performance has been strong, with returns of 15.7% over the past week, 10.8% over the past month, 15.7% year to date, and 40.6% over the past year.
- The company currently scores 0 out of 6 on undervaluation checks, suggesting that it may be overvalued.
- A Discounted Cash Flow (DCF) analysis implies that the stock is about 31.8% overvalued.
- The Price-to-Sales (P/S) ratio of 9.65x is above the industry average of 5.16x and the peer average of 7.40x.
- A proprietary "Fair Ratio" of 8.76x suggests that Microchip Technology is trading at a richer level than the model implies.
Introduction to Microchip Technology’s Valuation
Microchip Technology’s recent share performance has been impressive, with significant returns over the past week, month, year to date, and past year. This raises questions about whether the company’s story is already priced in and how much potential for growth is still available. Recent headlines have focused on the company’s role in the broader semiconductor supply chain and how investors are treating chip-related names. Despite this, Microchip Technology currently scores 0 out of 6 on undervaluation checks, suggesting that it may be overvalued.
Discounted Cash Flow Analysis
A Discounted Cash Flow (DCF) model projects a company’s future cash flows and discounts them back to today to estimate what the business could be worth right now. For Microchip Technology, the model used is a 2-Stage Free Cash Flow to Equity approach. The company’s latest twelve-month free cash flow is reported at $678.6 million, with projected free cash flow reaching $2.6 billion in 2030. When these projected cash flows are discounted to today and added together, the model arrives at an intrinsic value estimate of US$57.07 per share. Compared with the recent share price of US$75.22, this implies that the stock is about 31.8% overvalued according to this DCF analysis.
Price-to-Sales Ratio Analysis
The preferred valuation yardstick for Microchip Technology is the Price-to-Sales (P/S) ratio, which can be useful for companies where revenue is a clearer reference point than earnings. The P/S ratio lets you see how much investors are paying for each dollar of sales, which is particularly relevant for semiconductor names where margins and earnings can move around. Microchip Technology trades on a P/S of 9.65x, which is above the Semiconductor industry average of 5.16x and the peer average of 7.40x. A proprietary "Fair Ratio" of 8.76x suggests that Microchip Technology is trading at a richer level than the model implies.
Narratives and Fair Value
There is an even better way to understand valuation, which is to use Narratives, a simple way to write the story behind your numbers by linking your view of Microchip Technology’s future revenue, earnings, and margins to a forecast and then to a fair value. This approach is available within the Simply Wall St Community page, where Narratives are continuously refreshed when new news or earnings arrive. Investors can use Narratives to decide whether to buy, hold, or sell by comparing their Fair Value to the current price. One investor might build a Narrative closer to the higher US$90 analyst target if they focus on factors like AI and edge computing demand and the long-term margin outlook. Another might lean toward the lower US$60 target if they are more focused on risks such as inventory, debt, and competition.
Conclusion and Disclosure
In conclusion, Microchip Technology’s recent share performance has been strong, but the company currently scores 0 out of 6 on undervaluation checks, suggesting that it may be overvalued. A DCF analysis implies that the stock is about 31.8% overvalued, and the P/S ratio is above the industry average and peer average. Investors can use Narratives to understand the story behind the numbers and make informed decisions. This article is general in nature and provides commentary based on historical data and analyst forecasts only using an unbiased methodology. It does not constitute a recommendation to buy or sell any stock and does not take account of individual objectives or financial situations. Simply Wall St has no position in any stocks mentioned and aims to bring long-term focused analysis driven by fundamental data.
