Microchip Technology (NASDAQ:MCHP ) shares rose around 1% in premarket trading Friday after Piper Sandler analysts upgraded the stock to Overweight, citing “numerous growth levers set to turn on in the near term.”
Above all, analysts believe that MCHP is poised for a significant improvement in gross margins as underutilization and inventory reserve charges begin to ease and reverse.
The company’s earnings may currently be at their lowest point, they note, following the full impact of these charges in recent quarters.
On the demand side, MCHP's product technology is seen as well-positioned in both the automotive and industrial markets, which are expected to lead to positive outcomes in the company's December guidance.
"Overall, we see MCHP as one quarter behind its analog peers in the fundamental recovery, which has provided opportunity for the stock,” analysts said.
“We believe that MCHP is attractive here given the company’s track record and execution when coming off the bottom of analog cycles.”
The investment bank highlights two key factors that are expected to boost Microchip Technology’s gross margins in the coming quarters.
First, underutilization charges are set to decrease as revenue and utilization rebound, with the potential for margins to rise to 65% by the end of FY26, up from a low of 59% in the September quarter.
Second, the impact of inventory reserve charges, which totaled $33 million and $20 million in the March and June quarters respectively, is expected to diminish as the business environment improves. As MCHP’s visibility increases and demand strengthens, these charges should become tailwinds, further enhancing margins as the market cycle turns positive.
“We see these green shoots in demand happening over the near term, and indications for demand are positive in selective areas of the market while cancellations have also come down,” analysts noted.
Alongside an upgrade, Piper Sandler also hiked the price target on MCHP stock from $90 to $100.
Source: Investing.com