Microchip; Making the Macro from the Micro
Disclaimer
This is in no way, shape or form, fluid and function, an analytical, qualitative or intelligent compte rendu. There is absolutely no financial advice here because the only financial advice I can give is to research, research, and research. The purpose of this analysis is to serve as an example of an investigation into a company's background, fundamentals, and assets through various lenses to determine what is a good potential investment. The function of this write up is to serve as an educational resource for investors looking to understand how to find good investments. So read and learn some things about a company building it's brand through open-source and education, right here in America.
Pre-Thesis
This would have been a great analysis to get out before 11/8/2021, so the reader can see just what deep research gets you:
In preparation for investor day, I outlined in my thesis my belief's that Microchip will push 4 key elements; First, Microsemi Debt paid off and books corrected. Second, their Internet of Things product line. Third, big push to domesticate the supply line (starting in Colorado Springs at their Fab 5
factory). Fourth, a big push in Space and Defense products. While this analyst still believes a big Space and Defense announcement is coming, Microchip showcased their massive role in EVs, specifically the chargers to be used in the Build Back Better plan. In the analysis I Illustrated their technology role as being part of a composite, far behind the technological breakthroughs NVIDIA and AMD are fighting over right now. And Microchip stressed this as well, showing they are a major piece of every single multi-component piece of technology. Microchip stressed paying off their bonds, something I illustrated their strong preference of, showcasing it as a slight weakness when now is the best time to start spending and taking debt in order to grow (hyperinflation baby). I pointed out systemic weaknesses in their sales strategies, which they highlighted in their investor day presentation. I pointed to their over-commitment to corporate culture, which their whole investor day wreaked of horrifically.
All of this was made apparent after some(many) hours of research. I wanted so badly to publish it before the investor day to serve as an introduction for it. I have had these words written (un-edited, which has been done post investor day), and for some reason, I didn't have the conviction to post it. I lay bare my weakness to illustrate one simple concept, I didn't feel comfortable posting an analysis with so much conjecture built on an abstract puzzle-work, so I didn't do it. I waited. Sure, I was right this time, but I always trust when my heart and my head agree. Self-doubt isn't a weakness, it is a time for reflection and deep analysis. I'm happy I waited until investor day, because it allows me to illustrate how each piece of research led to a near-perfect prediction of the presentation, and why Microchip has a bright future over the next decade, even with nascent technological breakthroughs.
Thesis
Are there more dreaded words than 'Some Assembly Required'? Not for Microchip, one of the largest purveyors of Microcontrollers in the world. It is extremely probable that any device used to read these words are built with pieces from Microchip. Microchip Technology started in 1987 as the supplier of the future of the world, of silicone wafer technology capable of amazing electronic feats. Where breakthrough technology ages, their business only expanded. With some homegrown research and development breakthroughs, a significant number of acquisitions, and a touch of patent and product preservation, Microchip has remained much the same company; offering the bits and pieces powering everything else. While NVIDIA and AMD may get all the glory of the "chip" companies, they play a war of attrition and constant evolution of escalation. In all its glory, the modern age is built on yesterday's next-wave, and all of it is built with Microchip. Or rather Microchips, built and created by one of the few commercial suppliers right here in America.
Much of the delay in writing this analysis, and in turn forming this hypothesis, comes from the simple question of why does Microchip fall in every banking crisis? Microchip is a core technological brick in the steadily building fortress of modern society, it's parts ubiquitous in nearly all digital devices. As much as any company may huff and puff about increased costs, they have no problem putting them on consumers. If the world wants to grow, Microchip will grow, no matter how much it costs… or will it?
10-Q and other financial documents suggest Microchip bit the bullet and used amortization - technological debt- rather than price increases to keep strong books through COVID. While they could get away doing it a few more years for the sake of the positive EPS, when does the investor stop investing in past triumph? Sales revenue needs to increase, which means inflation needs to increase in their product costs. Over time, this could cause a massive cliff in demand, leading to a surprise horror-quarter, which means Microchip becomes a macro-correlative stock.
For a company that should be sweating about their future in the face of massive supply chain constraints, possible cold war with China, possible global financial crisis, massive commodity inflation, labour squeeze, change to a digidollar; Microchip is really focused on paying off their past. It is imperative for companies to sell their shares to fund future growth, and to avoid future problems. With so much doubt ahead, Microchip used those shares to pay off a big chunk of their bonds, some due quite well into the future. Use of funds is an incredibly important aspect of a business, and while some may favour paying off debt well before need, this is more a cheap trick than a stimulus for growth. In turn, it is imperative to ask, in the event of reduced loans, and high rates, where will Microchip get money to keep it's debt cycle going?
But the truth is, an institutional investor would absolutely buy Microchip bonds, especially knowing they are convertible and hyperinflation ultimately leads to public valuation hyperinflation. The bonds are the perfect mix of safe 4+% in a ten+ year bond, with the possibility of converting to public shares. The company itself is critical to the next segment of rapid technological development. Internet of Things, a massive push in nationalizing wafer fabrication to prevent future supply constraints via massive growth of their Colorado Springs Facility. The company is certainly bullish on itself: announcing a Microchip 3.0 flaunting it's impressive quarterly cash flow leading to a lack of need for further debt, an internalized R&D structure resolute to never acquire (Microsemi hurt that bad, eh?), and a firm place in the Build Back Better plan for America. As for it's equity, this analyst views Microchip as nothing but upside and sunshine, but it's current price stands on shaky ground.
Growth stocks versus Value stocks? When does a Value stock become a Growth stock? When does a Growth stock become a Value stock? What the hell are Meme stocks and where do they fit? These questions are irrelevant, as long as the market forms a rational and coherent set of rules agreed upon by a supra-majority as a means to prevent an overwhelming market-wide bubble of unrealistic and unsustainable asset valuations. With a P/E of nearly 100 (at 11/5/2021), $5.5 billion in net sales for 2021, a market capitalization of $50 billion at $90 per share, give or take; at least Microchip is a dividend stock. A big component to the rule of P/Ex5 is the continuity of sales, and the existence of longstanding contracts. Microchip didn't have either of these, until Q4 2021. A big component to my issue with Microchip's sales and books is that their contracts are non-existent, and instead of focusing on fixing it, they flaunted it in their investor day! If they aim to supply major distributors, there must be some resource left unseen or it is only done via painful phone or person to person communication. Recently they started pushing for long-term repeating contracts, a wise move offering everyone more security in avoiding future problems, but also setting themselves up for possible failures to produce and breach of contractual obligations if they don't plan accordingly.
The company will continue to benefit from market wide semiconductor and microchip momentum, if only just from the basket ETFs it gets thrown into by association. Microchip exists almost completely outside of what the majority of investors view as the microchip and semiconductor field, far afield from NVIDIA, Intel, AMD, et al. Part of that is to benefit, investors see the glamour of the name without realizing Microchip is possibly the lowest run of technology on the ladder. Part of that is to fault, as they may never get taken seriously for what they really are; essential.
A brief foray into consumer opinion on Microchip's products will lead any investigator into a repeating theme of open-source and learner-friendly. Microchip works hard for that, servicing themselves and their customers via a constant output of industry-geared and educational blog posts, amateur friendly series of courses, and an active supply of webcasts and video updates. Their entry-level programming tools for chip architecture is free, with the language made to fit the client. Truth be told, the company feels right. They have real products, they don't push their customers around and they lure with knowledge and positivity, not a cold futuristic tone. The 3.0 tone isn't this investor's flavour of choice, but that might be of benefit for the greater market. While the company may certainly win ESG awards for diversity in leadership, the hard truth is they aren't diverse from their field. If they deserve admiration in executive leadership, it'd be that their executive and CEO put their time in at Microchip, and not external or Wall Street arm-bending hires.
The recent Investor Day presentation is a must-read, well worth more than a few look-backs over time as they continue to progress along their plan. Microchip has done a beautiful job illustrating their strength through utility, necessity through ubiquity, and size through the micro. Should a bull market continue, Microchip is likely to ride the wave well. Should the stock, or market, take a tumble, Microchip might be one of the stocks for investors to fall back on when looking for fundamentals. While their recent proclamation against acquisitions might be a sigh of relief for the investor taking note of a Microsemi deal gone wrong, Microchip hasn't shown a real flair for leaping innovation in a world requiring massive revolutions. How Microchip leverages the technology they have for the next decade, with the technology they won't have after it, is just a multiple of acceleration, and not the driving force today. Building on what it has, rather than competing with everyone else for what no one has, Microchip just might continue to find itself the source of choice for pieces that work for vast industry of now.
Investor Day Breakdown
ww1.microchip.com/do...alyst+Day.110821.pdf
Some core themes come out of Microchip's early slides; a riveting demand to reward investors with a strong dividend and a promise to reach 100% Free cash flow to the dividend. And they really messed up their Microsemi deal, and any previous analyst discussion not slamming them for it is irresponsible. Analysis of their previous quarterly report financials makes it clear, after every big acquisition comes a long lead time on profitability, and a significant decline in immediate profitability. A rookie guess might be that they are cooking their acquisition's books to fulfill their contractual obligations, promising it as profit, and then forced to use their cash flow to fill the holes between what was contractually given and what was needed. Either way, there is a lawsuit worth monitoring pushing in hard, with insinuations of insider trading by the previous CEO, and now Executive chairman. Either way, the Microsemi issue is done with, unless the SEC chooses to reopen their investigation in the matter, which they and the DOJ both closed previously. This is one of the core elements of no where to go but up, but no reason why they aren’t down from where they are now.
Either way, the company is making it clear that Microchip 3000 won't make the same mistakes that Microchip 1000 and Microchip 2000 made. A good step might be to do a good old fashioned director shuffle, and with their leadership suite looking a little fragile, a major investor might consider a push in the next shareholder meeting to force some new brains at the corporate head. With all the language assuring no more acquisitions, there is a little language sprinkled in called for Small tuck-ins, so that investor might want to hurry on the c-suite changes. Half of the slides are dividends and debt payoff charts, over and over, which is a little concerning. For a company that offers education to their customers, but corporate bullshit to their investors, they clearly have a poor respect for the general investor-pool.
The product section starts with a simple statement of "We sell everything", otherwise called Total System Solutions. A big chunk of parts in a big chunk of critical pieces of infrastructure technology, and Microchip can evoke absolute market conquest. The subsections of the investor day focused on a few categories, starting with the Internet of Things and Data Centers. Aside from the impressive CAGRs, these categories only get bigger and bigger. The cloud is still growing, and the eventuality of a more connected world is slowly encroaching on even the largest critics stoicism. Microchip doesn't necessarily need to be the groundbreaker in any of these fields, they just need to be able to supply the pieces for it.
One big surprise, was just how impressive Automotive CAGR was for Microchip, and considering Automotive is ~15% of their sales. Microchip even throws out some flamboyant proclamations on their assured victory in EVs, such as #1 in touch screens and buttons for these cars. The real drum beat kicks off on page 81 of the presentation; a gleaming banner of every small little piece of every process that creating an automated car requires, all by Microchip.
The following section, labeled 5G, is just another example of Microchip's omnipresence. Careful acquisitions and portfolio buildups give flexibility and stretch, and with everything going digital, and the digital going digi-squared, Microchip gains. While 5G's CAGR is impressive, the ultimate market capitalization is tiny, which is fine, because 5G is just a stop-gap. As strange as it is to say, society is still early on in technology, and where it was obscene or impossible to create a world that moves itself to our will and whims, now it's just a simple technologization away, all done using pieces made by Microchip. When 6G comes around, it'll be done with pieces by Microchip. When every car drives itself and keeps internal cabin temperature at optimal comfort levels, it'll be done with Microchip's pieces all through-out.
At least that is what Microchip wants investors and analysts to believe. If the market contrarian is looking for their next victim, they'd be better suited to any number of banks or real estate companies. The bear case rests on two foundational arguments; First, Microchip will fail to deliver under increased client demand. Second, Microchip will lose customers through competition, technological superiority, or client disengagement. Microchip spends the remaining chunk of the presentation fortifying against these fears. Page 102 has a client list, showing that they have big clients already, and with a big push to modernize contracts, they expect big bills. Page 116 shows their plan to increase internalized manufacturing within 5 years, but nothing to desired levels. They commit to planned growth (manufacturing) of 6-8%, while they project a 20% increase in sales, meaning everyone should expect some price increases coming down the chain, which any investigator would know looking through their previous 10-Q way back in July.
For the ESG portfolio, Microchip plans to be Net Zero by 2040. For the company and industry, that would be an impressive feat worth applause, if anyone had any reason to believe them. No mention of a plan, plenty of participation awards, 2 slides thrown in for the bullshit sticker. 2040 feels just far enough away to never worry about it, while being able to throw together a slide every year showing a good amount of progress towards nothing at all. What's bothersome here is Microchip has a charity, and a really good one. If they spent half as much effort, or just put any effort into showing off their charity, or their educational resources, they really would have had a reason to deserve an ESG nod.
All in all, a completely predictable and boring day with little in the realm of surprises, and a bit more disappointment in failure to live up to previous core values and lack of a significant plan forward in the current macroeconomic environment and with modern supply constraints. It is all too apparent that the company has a significant gap in their customer facing relations and their investor facing relations. The analysis predicted a presentation devoid of technological leaps and bounds, and aside from one or two good slide sets early on, the whole thing sucked. 3.0 served as a painful reminder that Microchip 2.0 was the same as 1.0 and did all the same mistakes. 3.0 made 1 little change and investors are supposed to watch them make the same mistakes with the same people at the helm?
Random Tid-bits
www.microchip.com/en...ncial/annual-reports
This is in no way, shape or form, fluid and function, an analytical, qualitative or intelligent compte rendu. There is absolutely no financial advice here because the only financial advice I can give is to research, research, and research. The purpose of this analysis is to serve as an example of an investigation into a company's background, fundamentals, and assets through various lenses to determine what is a good potential investment. The function of this write up is to serve as an educational resource for investors looking to understand how to find good investments. So read and learn some things about a company building it's brand through open-source and education, right here in America.
Pre-Thesis
This would have been a great analysis to get out before 11/8/2021, so the reader can see just what deep research gets you:
In preparation for investor day, I outlined in my thesis my belief's that Microchip will push 4 key elements; First, Microsemi Debt paid off and books corrected. Second, their Internet of Things product line. Third, big push to domesticate the supply line (starting in Colorado Springs at their Fab 5
factory). Fourth, a big push in Space and Defense products. While this analyst still believes a big Space and Defense announcement is coming, Microchip showcased their massive role in EVs, specifically the chargers to be used in the Build Back Better plan. In the analysis I Illustrated their technology role as being part of a composite, far behind the technological breakthroughs NVIDIA and AMD are fighting over right now. And Microchip stressed this as well, showing they are a major piece of every single multi-component piece of technology. Microchip stressed paying off their bonds, something I illustrated their strong preference of, showcasing it as a slight weakness when now is the best time to start spending and taking debt in order to grow (hyperinflation baby). I pointed out systemic weaknesses in their sales strategies, which they highlighted in their investor day presentation. I pointed to their over-commitment to corporate culture, which their whole investor day wreaked of horrifically.
All of this was made apparent after some(many) hours of research. I wanted so badly to publish it before the investor day to serve as an introduction for it. I have had these words written (un-edited, which has been done post investor day), and for some reason, I didn't have the conviction to post it. I lay bare my weakness to illustrate one simple concept, I didn't feel comfortable posting an analysis with so much conjecture built on an abstract puzzle-work, so I didn't do it. I waited. Sure, I was right this time, but I always trust when my heart and my head agree. Self-doubt isn't a weakness, it is a time for reflection and deep analysis. I'm happy I waited until investor day, because it allows me to illustrate how each piece of research led to a near-perfect prediction of the presentation, and why Microchip has a bright future over the next decade, even with nascent technological breakthroughs.
Thesis
Are there more dreaded words than 'Some Assembly Required'? Not for Microchip, one of the largest purveyors of Microcontrollers in the world. It is extremely probable that any device used to read these words are built with pieces from Microchip. Microchip Technology started in 1987 as the supplier of the future of the world, of silicone wafer technology capable of amazing electronic feats. Where breakthrough technology ages, their business only expanded. With some homegrown research and development breakthroughs, a significant number of acquisitions, and a touch of patent and product preservation, Microchip has remained much the same company; offering the bits and pieces powering everything else. While NVIDIA and AMD may get all the glory of the "chip" companies, they play a war of attrition and constant evolution of escalation. In all its glory, the modern age is built on yesterday's next-wave, and all of it is built with Microchip. Or rather Microchips, built and created by one of the few commercial suppliers right here in America.
Much of the delay in writing this analysis, and in turn forming this hypothesis, comes from the simple question of why does Microchip fall in every banking crisis? Microchip is a core technological brick in the steadily building fortress of modern society, it's parts ubiquitous in nearly all digital devices. As much as any company may huff and puff about increased costs, they have no problem putting them on consumers. If the world wants to grow, Microchip will grow, no matter how much it costs… or will it?
10-Q and other financial documents suggest Microchip bit the bullet and used amortization - technological debt- rather than price increases to keep strong books through COVID. While they could get away doing it a few more years for the sake of the positive EPS, when does the investor stop investing in past triumph? Sales revenue needs to increase, which means inflation needs to increase in their product costs. Over time, this could cause a massive cliff in demand, leading to a surprise horror-quarter, which means Microchip becomes a macro-correlative stock.
For a company that should be sweating about their future in the face of massive supply chain constraints, possible cold war with China, possible global financial crisis, massive commodity inflation, labour squeeze, change to a digidollar; Microchip is really focused on paying off their past. It is imperative for companies to sell their shares to fund future growth, and to avoid future problems. With so much doubt ahead, Microchip used those shares to pay off a big chunk of their bonds, some due quite well into the future. Use of funds is an incredibly important aspect of a business, and while some may favour paying off debt well before need, this is more a cheap trick than a stimulus for growth. In turn, it is imperative to ask, in the event of reduced loans, and high rates, where will Microchip get money to keep it's debt cycle going?
But the truth is, an institutional investor would absolutely buy Microchip bonds, especially knowing they are convertible and hyperinflation ultimately leads to public valuation hyperinflation. The bonds are the perfect mix of safe 4+% in a ten+ year bond, with the possibility of converting to public shares. The company itself is critical to the next segment of rapid technological development. Internet of Things, a massive push in nationalizing wafer fabrication to prevent future supply constraints via massive growth of their Colorado Springs Facility. The company is certainly bullish on itself: announcing a Microchip 3.0 flaunting it's impressive quarterly cash flow leading to a lack of need for further debt, an internalized R&D structure resolute to never acquire (Microsemi hurt that bad, eh?), and a firm place in the Build Back Better plan for America. As for it's equity, this analyst views Microchip as nothing but upside and sunshine, but it's current price stands on shaky ground.
Growth stocks versus Value stocks? When does a Value stock become a Growth stock? When does a Growth stock become a Value stock? What the hell are Meme stocks and where do they fit? These questions are irrelevant, as long as the market forms a rational and coherent set of rules agreed upon by a supra-majority as a means to prevent an overwhelming market-wide bubble of unrealistic and unsustainable asset valuations. With a P/E of nearly 100 (at 11/5/2021), $5.5 billion in net sales for 2021, a market capitalization of $50 billion at $90 per share, give or take; at least Microchip is a dividend stock. A big component to the rule of P/Ex5 is the continuity of sales, and the existence of longstanding contracts. Microchip didn't have either of these, until Q4 2021. A big component to my issue with Microchip's sales and books is that their contracts are non-existent, and instead of focusing on fixing it, they flaunted it in their investor day! If they aim to supply major distributors, there must be some resource left unseen or it is only done via painful phone or person to person communication. Recently they started pushing for long-term repeating contracts, a wise move offering everyone more security in avoiding future problems, but also setting themselves up for possible failures to produce and breach of contractual obligations if they don't plan accordingly.
The company will continue to benefit from market wide semiconductor and microchip momentum, if only just from the basket ETFs it gets thrown into by association. Microchip exists almost completely outside of what the majority of investors view as the microchip and semiconductor field, far afield from NVIDIA, Intel, AMD, et al. Part of that is to benefit, investors see the glamour of the name without realizing Microchip is possibly the lowest run of technology on the ladder. Part of that is to fault, as they may never get taken seriously for what they really are; essential.
A brief foray into consumer opinion on Microchip's products will lead any investigator into a repeating theme of open-source and learner-friendly. Microchip works hard for that, servicing themselves and their customers via a constant output of industry-geared and educational blog posts, amateur friendly series of courses, and an active supply of webcasts and video updates. Their entry-level programming tools for chip architecture is free, with the language made to fit the client. Truth be told, the company feels right. They have real products, they don't push their customers around and they lure with knowledge and positivity, not a cold futuristic tone. The 3.0 tone isn't this investor's flavour of choice, but that might be of benefit for the greater market. While the company may certainly win ESG awards for diversity in leadership, the hard truth is they aren't diverse from their field. If they deserve admiration in executive leadership, it'd be that their executive and CEO put their time in at Microchip, and not external or Wall Street arm-bending hires.
The recent Investor Day presentation is a must-read, well worth more than a few look-backs over time as they continue to progress along their plan. Microchip has done a beautiful job illustrating their strength through utility, necessity through ubiquity, and size through the micro. Should a bull market continue, Microchip is likely to ride the wave well. Should the stock, or market, take a tumble, Microchip might be one of the stocks for investors to fall back on when looking for fundamentals. While their recent proclamation against acquisitions might be a sigh of relief for the investor taking note of a Microsemi deal gone wrong, Microchip hasn't shown a real flair for leaping innovation in a world requiring massive revolutions. How Microchip leverages the technology they have for the next decade, with the technology they won't have after it, is just a multiple of acceleration, and not the driving force today. Building on what it has, rather than competing with everyone else for what no one has, Microchip just might continue to find itself the source of choice for pieces that work for vast industry of now.
Investor Day Breakdown
ww1.microchip.com/do...alyst+Day.110821.pdf
Some core themes come out of Microchip's early slides; a riveting demand to reward investors with a strong dividend and a promise to reach 100% Free cash flow to the dividend. And they really messed up their Microsemi deal, and any previous analyst discussion not slamming them for it is irresponsible. Analysis of their previous quarterly report financials makes it clear, after every big acquisition comes a long lead time on profitability, and a significant decline in immediate profitability. A rookie guess might be that they are cooking their acquisition's books to fulfill their contractual obligations, promising it as profit, and then forced to use their cash flow to fill the holes between what was contractually given and what was needed. Either way, there is a lawsuit worth monitoring pushing in hard, with insinuations of insider trading by the previous CEO, and now Executive chairman. Either way, the Microsemi issue is done with, unless the SEC chooses to reopen their investigation in the matter, which they and the DOJ both closed previously. This is one of the core elements of no where to go but up, but no reason why they aren’t down from where they are now.
Either way, the company is making it clear that Microchip 3000 won't make the same mistakes that Microchip 1000 and Microchip 2000 made. A good step might be to do a good old fashioned director shuffle, and with their leadership suite looking a little fragile, a major investor might consider a push in the next shareholder meeting to force some new brains at the corporate head. With all the language assuring no more acquisitions, there is a little language sprinkled in called for Small tuck-ins, so that investor might want to hurry on the c-suite changes. Half of the slides are dividends and debt payoff charts, over and over, which is a little concerning. For a company that offers education to their customers, but corporate bullshit to their investors, they clearly have a poor respect for the general investor-pool.
The product section starts with a simple statement of "We sell everything", otherwise called Total System Solutions. A big chunk of parts in a big chunk of critical pieces of infrastructure technology, and Microchip can evoke absolute market conquest. The subsections of the investor day focused on a few categories, starting with the Internet of Things and Data Centers. Aside from the impressive CAGRs, these categories only get bigger and bigger. The cloud is still growing, and the eventuality of a more connected world is slowly encroaching on even the largest critics stoicism. Microchip doesn't necessarily need to be the groundbreaker in any of these fields, they just need to be able to supply the pieces for it.
One big surprise, was just how impressive Automotive CAGR was for Microchip, and considering Automotive is ~15% of their sales. Microchip even throws out some flamboyant proclamations on their assured victory in EVs, such as #1 in touch screens and buttons for these cars. The real drum beat kicks off on page 81 of the presentation; a gleaming banner of every small little piece of every process that creating an automated car requires, all by Microchip.
The following section, labeled 5G, is just another example of Microchip's omnipresence. Careful acquisitions and portfolio buildups give flexibility and stretch, and with everything going digital, and the digital going digi-squared, Microchip gains. While 5G's CAGR is impressive, the ultimate market capitalization is tiny, which is fine, because 5G is just a stop-gap. As strange as it is to say, society is still early on in technology, and where it was obscene or impossible to create a world that moves itself to our will and whims, now it's just a simple technologization away, all done using pieces made by Microchip. When 6G comes around, it'll be done with pieces by Microchip. When every car drives itself and keeps internal cabin temperature at optimal comfort levels, it'll be done with Microchip's pieces all through-out.
At least that is what Microchip wants investors and analysts to believe. If the market contrarian is looking for their next victim, they'd be better suited to any number of banks or real estate companies. The bear case rests on two foundational arguments; First, Microchip will fail to deliver under increased client demand. Second, Microchip will lose customers through competition, technological superiority, or client disengagement. Microchip spends the remaining chunk of the presentation fortifying against these fears. Page 102 has a client list, showing that they have big clients already, and with a big push to modernize contracts, they expect big bills. Page 116 shows their plan to increase internalized manufacturing within 5 years, but nothing to desired levels. They commit to planned growth (manufacturing) of 6-8%, while they project a 20% increase in sales, meaning everyone should expect some price increases coming down the chain, which any investigator would know looking through their previous 10-Q way back in July.
For the ESG portfolio, Microchip plans to be Net Zero by 2040. For the company and industry, that would be an impressive feat worth applause, if anyone had any reason to believe them. No mention of a plan, plenty of participation awards, 2 slides thrown in for the bullshit sticker. 2040 feels just far enough away to never worry about it, while being able to throw together a slide every year showing a good amount of progress towards nothing at all. What's bothersome here is Microchip has a charity, and a really good one. If they spent half as much effort, or just put any effort into showing off their charity, or their educational resources, they really would have had a reason to deserve an ESG nod.
All in all, a completely predictable and boring day with little in the realm of surprises, and a bit more disappointment in failure to live up to previous core values and lack of a significant plan forward in the current macroeconomic environment and with modern supply constraints. It is all too apparent that the company has a significant gap in their customer facing relations and their investor facing relations. The analysis predicted a presentation devoid of technological leaps and bounds, and aside from one or two good slide sets early on, the whole thing sucked. 3.0 served as a painful reminder that Microchip 2.0 was the same as 1.0 and did all the same mistakes. 3.0 made 1 little change and investors are supposed to watch them make the same mistakes with the same people at the helm?
Random Tid-bits
- www.microchipdirect.com/
Going through the full catalog for Microchip one thing is clear: They are everywhere. No matter the random application need, Microchip aims to have a product. In this regard, Microchip doesn't have to be the best at anything, or to have the most cutting edge tech, they just have to sell a safe alternative. Not only that, but one thing I am consistently finding when customers discuss Microchip's products; open-source.
- www.firstinspires.org/
Microchip's (Organizing Sponsor)/Charity organization is an awesome-looking one. This analyst has had the pleasure of volunteering in various charities over the years, and these robotics ones are among the best for interaction, creativity, and learning. This is a good way to build out the creator brand, build up serious ESG-glamour, and give back to the world and communities.
www.microchip.com/en...ion/academic-program
secure.microchip.com/mu
www.microchip.com/en...ical-learning-center
And what starts with education, ends with education. Microchip looks like it wants to build growth the best way it can, organically - through education. Microchip goes above and beyond the catering web-streams to push their own products, it looks like there was serious work done in an effort to broach the technology to classrooms from elementary thru technical post-secondary and management level sessions. Compared to their premiere competitors TSMC, Intel, Micron, Samsung; all with mighty fine sites and mighty fine research centers, but absolutely none with material geared towards educating young to old. When investing for the future, it's easy to say forget everyone not in the future, but Microchip did real work to try and bring the rest of us up to speed, and that doesn't just deserve respect, it shows understanding. One comment from the Wikipedia article was 100 quarters of profit, something so benign and simple, yet powerful. The company aims to be profitable, not king. Microchip looks intent to continue it's organic growth and expansion, pushing into everything the same way it has; with acquisitions and tactical plans. These are going to be 2 key elements to look for in the Investor day coming up; acquisition geared towards a push into a weakness, or a detailed plan showing strategic positioning as the supply chain continues to be disturbed for some time, and how it will rotate into the competition for microchip dominion.
research.tsmc.com/en...versity-centers.html
- www.sec.gov/ix?doc=/Archi...
Page 27 has some language that should absolutely be read:
Our manufacturing operations include wafer fabrication, wafer probe, assembly and test. The ownership of a substantial portion of our manufacturing resources is an important component of our business strategy, enabling us to maintain a high level of manufacturing control, resulting in us being one of the lowest cost producers in the embedded control industry. By owning wafer fabrication facilities and our assembly and test operations, and by employing statistical techniques (statistical process control, designed experiments and wafer level monitoring), we have been able to achieve and maintain high production yields. Direct control over manufacturing resources allows us to shorten our design and production cycles. This control also allows us to capture a portion of the wafer manufacturing and assembly and testing profit margin. We do outsource a significant portion of our manufacturing requirements to third parties and the amount of our outsourced manufacturing has increased in recent years due to our acquisitions of Microsemi and other companies that outsourced all or substantial portions of their manufacturing.
And it looks like they are finally fixing their sales-holes by getting long commitment contracts, and best part is it looks like customers did want them.
In the fourth quarter of fiscal 2021, we launched our Preferred Supply Program, which provides our customers with prioritized capacity beginning 6 months after their order of 12 months of continuous, non-cancellable and non-reschedulable backlog. Demand outpaced capacity improvements that we implemented in the first half of fiscal 2022 resulting in lead times continuing to extend out. We experienced constraints in our internal and external factories and their related manufacturing supply chains. We worked closely with our wafer fabrication, assembly and test subcontractors to secure additional capacity wherever possible. We expect that certain wafer fabrication, assembly and test constraints will persist through calendar 2022 and possibly beyond.
- asia.nikkei.com/Busi...-as-TSMC-hikes-rates
Taiwan Semiconductor Manufacturing Co (TSMC), the number one chip-maker, has come out saying they are increasing their costs for chips. Due to a variety of reasons, commodity prices, inflation, margins, demand, progressive technological costs, this will be spread across the entire industry. As there is such a significant chip shortage now, and well into the future, it is unlikely that any increase in price per chip is going to dent in their chips served. Most of this will be carried over onto the consumer, causing significant price increases, but again, something that the consumer will struggle to live without. While this is just a simplified example of macroeconomic struggles, the outcome is clear:
Increased revenue numbers leading to increased EPS.
- www.microchip.com/en-us/about/blog
First time I have gone to a company's blog and it is actively updated with qualified and well-themed articles showing Microchip's activities in nascent technologies and problem solving.
- en.wikipedia.org/wik...Microchip_Technology
The benefits of doing research on a public and prominent company is that someone else has done a vast majority of the research and assembled it. Most of this process is dissection and consumption; which data is good and which data is actionable. From the wikipedia entry, we see Microchip's history in all its splendor and failure. A brief understanding and review of the business model and major brands is always important, and it is easily done now. An important section to read is their Acquisition section. Microchip have a long history of pulling in privately held companies to expand their portfolio and speed up their research and development departments. It's impossible to say if every one of these was done well or important in the long run, but many were expansions rather than conquering upstarts.
- www.microchip.com/en-us/about/investors --> MCHP Announces 2-for-1 Stock Split
October 4, 2021 a 2-For-1 stock split. Specifically mentioned for liquidity and retail interest.
- en.wikipedia.org/wik...AVR_microcontrollers
Simpler microcontrollers have a serious place in the market. While its simpler to assume the death of all things when focusing on investing for the future, the past will always have its weight. When brands exist that can intersect, hold its value from the past to the future, they are cornerstones of an investor's portfolio. Many of these 8-bit microprocessors are consumer and hobbyist, with the AVR brand being especially irreverent by the Arduino brand and open-source.
- www.microchip.com/en-us/about/investors --> Page 2 MCHP Announces Exchange of Convertible NotesAugust 12th - ~2.7 million shares in exchange for convertible notes (minus debt but a lot of shares on the market, likely to have been used later on for triggering the volatility and making some very lucrative options premiums)
www.microchip.com/en...ncial/annual-reports
- There were salary cuts during COVID, 20% executive, 10% non-manufacturing, and factory salaries were cut where possible, but no data given on amount. This isn't a great look, in todays atmosphere with skyrocketing inflation, it would be nice for a company with so much in profit to have taken the margin cut and keep their employees happy.
- Supply chain issues existed, and will continue to exist, and there may be business halts due to this.
- CEO transition in March, 2021, it looks like the old CEO will stay on in an executive role.
- Making serious attempts at diversifying board with hiring 1 woman and 1 black man (Karlton Johnson is ex-Colonel from USAirForce with lots of private military-facing companies) to a director role in 2021.
- Director bonuses of $78,000 average (they get 3k for coming to every director meeting via zoom + 75k cash bonus)
- Every director gets ~123k in Restricted Share Units - this could have been easily cut during COVID to preserve salaries and save face… (page 19 has an easy summary table)
- Proposed to increase executive compensation by a tid bit for 10 years.
- Page 39 has a table of insider and major holders. From this we know ~27% of the stock is owned by 4 major holders (1 of those being Sanghi the executive chair, how he holds on to his in his new role is anyone's guess, he is 65, so retirement could be on the table, and 5 million shares of MCHP can give a nice retirement - in cash).
- This paragraph on pg 106 which is just, really weird:
We promote employee adoption of our culture through a number of methods including training, mentorship, values-based performance reviews, employee engagement surveys, company-wide quarterly meetings, town hall meetings with the President and Chief Executive Officer and other executive team members, and an open-door policy of communication where employees are encouraged to interact directly with management.
- pg. 111 shows that while being an American company, headquartered in America, they are not selling to America:
Sales to foreign customers account for a substantial portion of our net sales. During fiscal 2021, approximately 77% of our net sales were made to foreign customers, including 22% in China and 16% in Taiwan. During fiscal 2020, approximately 78% of our net sales were made to foreign customers, including 21% in China and 15% in Taiwan.
This is definitely a weakness, but if their valuation and sales are geared towards international sales, would a possible transition and breakthrough in the domestic market (perhaps primarily geared through their launching EV and infrastructure prominence) be seen as a major upside worth a little upwards price discovery? Wish that were true, but:
A strong position in the Chinese market is a key component of our global growth strategy.
- Much of their business is done by immediate orders, not planned or recurring. This is not great for their sales team, but leaves much room for better directors to come in and improve the contracting, or finding businesses to contract.
- Dependent on international wafer foundries, to a tune of 61% of all sales in 2021 and 2020.
- $9.21 billion in debt through revolving credit facility aka bonds --> some of which they paid off with shares
- Conversion of our Convertible Debt will dilute the ownership interest of our existing stockholders.
Straight from their form. This is a major reason why so many of these companies have low volatility, or designed volatility, there are magic shares that they can legally and rightfully make. This is also why convertible bonds are bad, and public companies really should not be allowed to privately sell shares in such amounts that could sink the public-facing investors.
- Microchip's Colorado Springs Facility - Wafer Fabrication Fab 5
Microchip's twitter has a notice for a job fair in Colorado Springs, open to all for production specialists (fancy term for entry level grunt work). Page 126 - Properties Table gives us a clue into just what those production specialists might be producing. Now is a great time to break the need and to resolve supply chain issues. Furthermore, some of these bond buying programs, likely to be a big chunk of the Build Back Better program, is going to go into corporate bonds to resolve major supply chain constraints.
- Company is authorized to buyback 15 million shares of common stock. Share buybacks are really interesting because it is good for a company to try and buyback it's debt should it be able to and have no other sound avenue for increasing investor value, than by buying them out. Unfortunately, this is too often used to pump the company's own stock at the benefit of director's bonuses, and the shares are used as a gift to the directors. In this case, absolutely no money should go towards a buyback as Microchip needs to go a long way before they resolve their supply chain issues, and the best solution to this is money. Either way, this big is good for forever, and they did not buy any shares back yet (they filed it in 2016).
- Page 137 has a table with the geography - sales data. Asia leads with 55%, Europe 19.2%, Americas 25.5%.
- Quote from 138:
We continue to transition products to more advanced process technologies to reduce future manufacturing costs.
At least shows intent.
- During fiscal 2020, we announced our intention to re-purpose Fab 5 to manufacture discrete and specialty products in addition to a lower volume of a diversified set of standard products. In connection with these efforts, we reduced the clean room footprint and transferred certain higher volume products from Fab 5 to our 8-inch wafer fabrication facilities in Arizona and Oregon.
More info on the Fab 5 moves.
- pg 143 they have 11 million shares in their treasury, meaning they can pay off more debt and reward their directors… more.
- Microchip does their acquisitions through ghost corporations, allowing them to acquire under the radar, so if they have an acquisition coming up, it'll come through insider info or public announcement.
- pg 191 & 192 are legal matters; none really stand out but most reflect Microsemi being a poor acquisition target and possible insider trading by executives. The company filed to dismiss the major trial, but no word yet on resolution as of publication date.
Bull Case
The bull case is also the base case; everything continues on as it has, no major global event save for pure MADness can quench humanity's hunger for progress. Build Back Better or not, EV technology will spread, the charging network in any form is going to expand, more and more devices will become technologically driven, run on pieces built and designed by Microchip. There is some hope for 3.0 to actually avoid mistakes made by 2.0 and 1.0, but without greater C-suite turnover, it is extremely unlikely.
Hyper-bull case:
One of these infrastructure bills is going to have a semiconductor/microprocessor bill that supports domestication of the chip supply chain. Microchip is one of the few companies that would be perfectly placed to take advantage of such an event. Based off of their Twitter feed, and several quarterly reports focused on some changes at the Fab 5 factory, it is possible they are looking to expand production there. Ultimately, the government could boost it's bond-buying program in specific industries that are critical for continued development of the United States and to ensure a domestic supply chain, and buy bonds in Microchip pushing their growth. There is a potential CHIPS act with $52 billion in funding, most of that will be derivative funding for local and state governments to "support" semiconductor growth, but it only takes a spark to force extensive action. Microchip is in a unique position compared to it's American competitors, they fill too many gaps that others don't and won't.
www.reuters.com/worl...ing-bill-2021-11-10/
Bear Case
Under-promise, and Over-deliver. Wish that it were true companies would hold themselves to this, but when they make bold claims about double industry wide growth with absolutely no mention of imminent and intrepid barriers ahead, it's important remind oneself of the fundamentals.
A simple bear case scenario; COVID strikes back, southeast Asia turns into a shit-show, again, and Multichip has absolutely no supply for ~6 months again. They have inventory for 3 months, they have factories in the US they could attempt to ramp up, and they have a few more years of debt to keep clean books. However, what really happens is companies look for third party suppliers, and start making permanent changes to their purchases. Those long term contracts will help wandering eyes, but Microchip can't handle a 6 month shutdown without composite decrease in demand, making them a very weak supply barrier. Bigger pushes into domesticating production would have been the killer for this flavour of the bear, but Microchip had too many dividends to pay to worry about that.
Another grizzly scenario; Innovative leap! Carbon fiber has significant limitations that could prevent wide-spread adoption, but it takes one company getting it right enough to start cutting into a broken supply chain. Microchip would still have some years before any nascent technology knocks them off their blocks, but that doesn't mean it wouldn't notch a crack. Microchip tries to show off their own R&D on occasion, and previous press releases inform they have similar programs looking at Silica replacements, but nothing about their previous developments suggest they get to win this race.
The great big bull in the sky dies, markets fall off a cliff, consumers slow down, stagnation, recession, all of it hits at once. Microchip gets chunked the same as every company, but they aren't the excess fat. It'll take more than some bad banks to break Microchip's grasp on the future, but they aren't guaranteed to enjoy a 100x+ PE longer than the market allows.
Disclaimer
Thank you for your time, I truly value it, and hope that this brings value to it. This analysis is not to serve as primary financial advice, rhyme or reason. This work is to serve as an editorialized overview of the parts and pieces of the company, as well as the different ways this author analyzes them. As of the date of publication, 11/12/2021, this author has a small derivative investment in $MCHP Microchip. This derivative was bought based on a hypothesis formed pre-investor day, is tiny, and in no way affects the tone of the article. As much as this analyst approves and likes Microchip's portfolio, its not my cup of tea.
As the primary purpose of this article is to be informative of the company, the stock market, and relevant market mechanics, please feel free to ask any questions.
Thank you.
Quick note: I have the financials commented up, but TradingView doesn't have in-lining so if you really want to read rudimentary accounting, ask them to add picture in-lining to their Ideas!