5 Reasons the Rebound in Microchip Technology Stock Is Real

Key Points

• Microchip Technology had a better-than-expected quarter and indicated an inflection was reached.
• The outlook is for accelerating growth with the possibility of outperformance due to its U.S.-based fab footprint.
• Analysts are raising targets and signalling a rebound in the price action. 

Microchip Technology NASDAQ: MCHP stock is rebounding, and the rebound is real.

It is real because the business reached the bottom of the cycle, demand improved, and an inflection point was reached at the end of F2024.

The company reported a year-over-year decline for the 4th fiscal quarter; however, the decline was less than expected, and sequential growth is expected in fiscal Q1 2025, and the odds are high that guidance is cautious.

Here’s a look at five reasons why Microchip Technology is a buy for 2025 and one that can return high-double to low-triple-digit total returns within the next 12 to 18 months. 

#1. Microchip Technology's Domestic Fabs Are Well-Positioned

The number one reason Microchip Technology is a good buy in Q2 2025 is its semiconductor market position. 

The company is a critical link in the manufacturing supply chain, producing multiple lines of microcontroller, mixed-signal, analog, and flash-IP semiconductor products for industries across verticals. 

Its leading end markets include industrial, automotive, data center, appliance, and IoT. Additionally, it is a U.S.-based semiconductor manufacturer with fabs located in Oregon and Colorado. There is some exposure to Asia, but it is limited and does not include China.

The critical takeaway is that Microchip Technology has an advantage in the world of onshoring U.S. semiconductor manufacturing and will build on it in 2025. 

#2. Q4 Results Were Better Than Expected

Microchip Technology didn’t have a robust quarter, with revenue down 27% year-over-year, but the decline wasn’t as alarming as expected.

Earnings quality remains, and signs of a rebound have already emerged. The company reported the first positive book-to-bill ratio in years, a signal execs hailed as a clear sign of a market bottom.

The guidance was also hot with Q1 F2025 results expected above the consensus on the top and bottom lines, and inventory reduction is in play. Inventory reduction is critical because it frees up cash and positions the company to begin ramping production to match demand.

Another crucial detail is that positive cash flow allows the company to pay down debt and return capital to shareholders. 

#3. Microchip Technology Has a Fortress Balance Sheet

Microchip Technology's balance sheet is a fortress, and that is at the bottom of the downcycle. Highlights from Q4 and FY2024 include $356.2 million in debt reduction, repositioning the revolving credit facility with more favorable terms, and the continuation of investment-grade credit ratings.

While this company isn’t repurchasing active shares, its debt reduction reduced outstanding convertible debt and the diluted count by 1.2% in the quarter.

The balance sheet highlights also include slightly reduced assets, but the liability reduction offsets it, leaving equity up 630 basis points with debt reduction and equity gains expected in 2025, potentially accelerating as the business rebound gains traction. 

#4. Microchip Technology Is a High-Yielding Stock

Microchip Technology's dividend has several attractive features, including the yield, safety, and growth outlook.

The yield in early May is running near 3.7% and the five-year compound annual growth rate is near 20%.

The only red flag is the payout ratio, above 100% in 2024 and 2025, but there is a mitigating factor; the balance sheet and cash flow.

The balance sheet and cash flow are healthy enough to sustain the distribution and financial health until dividend coverage is improved. 

Additionally, management has not signaled any plans to reduce the payout, reinforcing confidence in its sustainability.

This commitment to the dividend further supports Microchip’s appeal as a reliable income stock during its rebound.

#5. The Analysts' Sentiment Bottomed for MCHP Stock

Analysts' sentiment helped drive MCHP stock to its lows, specifically, a trend in price target reductions, but its bottom is also in. The first post-release revisions are significant price target increases that align with the consensus target and forecast a 35% upside relative to the pre-release close.

That is sufficient to put this stock at a three-quarter high and on track to regain support at a critical uptrend line. In that scenario, this stock could advance by triple digits to retest highs near $100.