we think that Microchip Technology Inc. is currently a better semiconductor technology bet than Texas Instruments Incorporated, MCHP stock trades at 8.1x trailing revenue, which is lower than TXN, which has a P/S multiple of 10x. Does this difference in valuation of companies make sense? We don’t think so and we hope Microchip technology will bridge this gap. While both companies were not significantly disrupted by the pandemic, MCHP has seen more rapid sales growth than TXN over the past five fiscal years. Microchip’s revenue has grown nearly 2-fold since Fiscal Year 17 (MCHP’s fiscal year ends in March) and is currently at $6 billion on an LTM basis. At the same time, TXN sales jumped from $13.4 billion in fiscal ’16 to $15.8 billion in fiscal ’18 for the first time, returning to about $14.5 billion in fiscal ’20. However, Texas Instruments sales have since recovered, and are currently at $17.6 billion on an LTM basis. For details regarding TXN revenue and peer comparison, see Texas Instruments Incorporated Revenue Comparison,
Having said that, we dive deeper into the comparison, which makes Microchip Technology a better bet than Texas Instruments on these evaluations. Let’s step back to look at the full picture of both companies’ relative valuations combined with detailed historical revenue growth as well as operating income growth and financial position, expected returns. our dashboard Microchip Technology vs Texas Instruments: Industry Competitors, But Microchip Technology Is a Better Bet There is more detail on this. The excerpts of the analysis are summarized below.
1. Microchip Technology Ahead on Revenue Growth
Microchip technology has seen much faster and more consistent revenue growth over the years. MCHP sales grew from $3.4 billion in FY17 to $6 billion on an LTM basis, while Texas Instruments saw more disproportionate growth over the period, with sales growing only 30% compared to $13.4 billion in FY16. 17.6 billion dollars. ,
Additionally, MCHP has pre-Covid annual sales growth of 20.4%, several times higher than TXN’s 2.8%, but growth during COVID is slightly lower at -1.4% compared to TXN’s marginal 0.5%. However, a look at recent trends shows that Microchip saw 26% YoY and 5.1% QoQ sales growth for its most recent quarter (Q2 ’22), compared to TXN’s 21.6% and 1.4%, respectively.
Lastly, the last three fiscal year sales growth for Microchip is 12%, which is much higher than TXN’s -0.9%.
2. EBIT Margin and Financial Position: Texas Instruments Ahead
Microchip’s P/EBIT ratio currently stands at about 48x, more than double TXN’s 21.3x. However, Microchip’s LTM EBIT margin currently stands at 17%, much lower than TXN’s 47%, and Microchip also lags slightly in terms of LTM margin change compared to the last three fiscal years, with an increase of 4.3% versus TXN. of 6%.
Additionally, Microchip’s debt as a % of equity currently stands at 17.2%, much higher than TXN’s 4.4%. TXN is also ahead in terms of cash as a % of assets, with 42%, much higher than Microchip’s 1.6%. However, these numbers can be attributed to the fact that Microchip is still in its development phase compared to Texas Instruments, a more stable company (as can be seen from the difference in revenue growth numbers).
For additional details about Microchip’s historical returns and comparison to peers, see Microchip Technology Stock Returns,
3. Lastly, Microchip Leads in Expected Returns
Due to the high volatility in P/E and P/EBIT, using P/S as the basis, we believe Microchip is the better choice. Microchip’s LTM revenue is $6 billion, which according to our estimates is expected to grow at a CAGR of approximately 19%, bringing the revenue number to $10 billion over three years. Assuming Microchip’s P/S ratio to be pulled back to about 6x, this still means the market cap will grow to $62 billion, an increase of about 30% over three years.
In comparison, looking at historical trends, we expect Texas Instruments sales to grow at a slower pace at a CAGR of only 1.6%, driving revenue to a little over $18 billion over three years. However, considering the P/S for Texas Instruments to drop 9x at a slower rate, we still anticipate a market cap of $168 billion for Texas Instruments, which is approximately 5% below today’s levels.
net of it all
Despite Texas Instruments’ revenue being larger than that of Microchip, the latter has recently seen faster and more consistent revenue growth, but is still in the growth phase and has much smaller margins than Texas Instruments. Having said that, our comparison of post-Covid recovery above shows that Microchip has shown stronger sales growth than Texas Instruments, and we believe profitability will pick up soon. Because of this, we believe Microchip deserves a higher P/S multiplier, and we expect MCHP to close the current gap in valuation between the two companies. As such, we believe that Microchip Technology stock is currently a better bet than Texas Instruments stock.
What if you’re looking for a more balanced portfolio instead? here is one high quality portfolio It has consistently outperformed the market since the end of 2016.
invest with traffic Market Beating Portfolio
see all traffic price estimate