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On Monday, Needham analysts increased the price target for Microchip Technology (NASDAQ:MCHP) shares from $60.00 to $66.00 while maintaining a Buy rating. The adjustment follows a business update call held by Microchip Technology earlier in the day. Key insights from the call include a significant improvement in bookings and a stabilizing backlog, which bolster confidence in the company’s March revenue guidance that management has reaffirmed. According to InvestingPro data, the stock is currently trading at premium multiples, with a P/E ratio of 104.5x and an EV/EBITDA of 27.2x.
Microchip’s management also revised the long-term operating model, now anticipating industry-plus revenue growth. The new expectations include a non-GAAP gross margin (NG GM) of 65%, which is a decrease of 300 basis points, and a non-GAAP operating margin (NG OM) of 40%, down by 500 basis points. This comes as InvestingPro data shows the company facing significant headwinds, with revenue declining 44.3% in the last twelve months.
Additionally, the company announced further reductions in headcount, which are expected to decrease operating expenses by $90-100 million and cost of goods sold (COGS) by approximately $25 million annually. These cost-saving measures have led Needham analysts to revise forward estimates for Microchip. Despite these challenges, the company maintains strong financial health with a current ratio of 2.25, and has consistently paid dividends for 24 consecutive years.
The new price target of $66.00 is based on a 30 times price-to-earnings (P/E) multiple of the updated fiscal year 2027 non-GAAP earnings per share (EPS) estimate of $2.20. This P/E multiple reflects an increase from previous estimates, indicating a positive outlook on the company’s financial performance and cost management strategies. The company’s strategic adjustments and the potential for increased profitability have been recognized by Needham in their revised valuation of Microchip Technology’s stock. For a deeper understanding of Microchip’s valuation and growth prospects, access the comprehensive Pro Research Report available exclusively on InvestingPro, which provides detailed analysis of over 1,400 US stocks.
In other recent news, Microchip Technology has announced a significant restructuring plan that includes cutting approximately 2,000 jobs, representing about 9% of its workforce. This move comes as the company adapts to a slowdown in the automotive industry, with expected costs between $30 million and $40 million for severance and related expenses. Additionally, Microchip Technology plans to close its Arizona manufacturing facilities earlier than anticipated, with operations ceasing by May. The company also faces charges of around $45 million due to changes in long-term supply agreements with certain wafer foundries. In another development, Robert A. Rango has retired from the company’s Board of Directors, effective February 19, 2025, with no immediate successor announced. Analysts have also weighed in, with Truist Securities reducing Microchip Technology’s price target to $56 while maintaining a Hold rating, citing missed earnings expectations and cautious guidance. Piper Sandler also adjusted its price target to $65, maintaining an Overweight rating, and expressed a belief that revenue and earnings might recover by the September 2025 quarter. These recent developments highlight the challenges and strategic shifts facing Microchip Technology amid changing market conditions.
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