As Microchip Technology approaches its upcoming earnings report, analysts and investors are looking closely at several factors that could influence the company’s performance and stock trajectory. The sentiment around Microchip Technology currently stands at a modest 4 out of 10, reflecting tempered expectations. Analyst Tim Arcuri from UBS recently shared a preview of the September quarter results, offering insights into some of the challenges the company is facing, as well as potential recovery markers in the months ahead. Here’s what to watch for in the report:

1. Earnings Projections and Sector Context

Microchip Technology has already set cautious guidance, projecting fiscal Q2 (September quarter) results that are generally in line with UBS’s expectations of $1.17 billion in revenue and earnings per share (EPS) of $0.44. In contrast to some of its peers in the semiconductor industry, Microchip’s forecast is relatively conservative, as broader market recovery has been slower than anticipated. Texas Instruments, a key competitor, has indicated that industrial-end markets are still struggling to bounce back significantly, which could signal continued pressure for Microchip as well.

Looking ahead to fiscal Q3 (December quarter), Arcuri anticipates further downside risk with revenue estimated to dip to $1.08 billion and EPS to $0.32. This downward revision suggests a potential 10% drop in guidance, although Arcuri also believes this quarter may represent the low point, with recovery momentum building in the March and June quarters of 2025.

2. Key Areas to Watch in the Earnings Report

Microchip’s earnings release will be particularly revealing when it comes to several important factors. Here are some of the most critical areas to monitor:

• Shifts in Customer Demand: Any signs of changes in customer behavior, such as a rise in rush orders or cancellations, could provide clues on the level of urgency and demand within Microchip’s core markets. Insights here could impact Microchip’s guidance and shed light on broader industry trends.
• Impact of the August Cyberattack: In late August, Microchip disclosed that it had been affected by a cyberattack. Investors will want to know if this incident has had any financial implications, potentially impacting operational continuity or customer relationships.
• Inventory Levels and Distributor Progress: Rising microcontroller (MCU) inventory levels at distributors have been a concern, and updates on this front could signal whether demand is beginning to align with supply. An over-inventory situation has weighed on Microchip’s outlook, and any steps toward normalization could be a positive sign.
• CHIPS Act Funding: The semiconductor industry is watching closely to see how CHIPS Act funding will be allocated, and Microchip’s progress on finalizing grant agreements could impact future operations and capital allocation. Updates on this topic could provide insight into the company’s strategic positioning within the U.S. semiconductor ecosystem.

3. Market Positioning and Flows: Sentiment Remains Cautious

Investor sentiment around Microchip is cautious, mirroring trends seen with similar semiconductor companies like NXP Semiconductors. Although concerns remain, especially with guidance from peers like STMicroelectronics and Renesas highlighting a challenging market, there is a sense that the downside may be limited. Recent positioning flows post-Texas Instruments’ earnings have been primarily on the sell side, with short selling being the primary driver of demand. Hedge funds, however, are beginning to show renewed interest in the stock, potentially signaling the beginning of a recovery play at these depressed price levels.

As Tim Arcuri notes, despite the immediate risks, Microchip may be near the bottom of this cycle, with a sharper recovery anticipated beginning in early 2025.

What’s Next for Investors?

The upcoming earnings report from Microchip Technology is likely to be a mixed bag. While fiscal Q2 results are expected to be in line with current guidance, a conservative outlook for Q3 and ongoing inventory challenges may keep pressure on the stock in the short term. However, investors with a longer-term perspective may find value, particularly if the anticipated recovery in 2025 materializes.

For those considering an investment, keeping an eye on how Microchip addresses customer demand, inventory normalization, and potential funding from the CHIPS Act will be key to gauging the company’s resilience in a challenging environment.