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Microchip Technology Inc (NASDAQ:MCHP) continues to face headwinds, including end-market inventory normalization, but the darkest days are behind it. The Q1 results and guidance outlook affirm what the Q4 F2024 results indicated: an industry-wide recovery was underway for semiconductors. The FQ1 2025 report’s key takeaway is that recovery is stronger than initially expected and is likely to continue accelerating in the upcoming quarters. The only sticking point is that the FQ2 guidance aligned with the market’s expectations, which provided no catalyst for a rally in August.
The longer-term outlook is for sustained growth, driven by strengths in all end markets, and for margin recovery to continue. The margin recovery is critical, aligning with an outlook for sustained capital return. Microchip Technologies’ dividend is an attractive payout at roughly a 2.8% annualized yield as of mid-August.
The payout comes with some risk, running well above the consensus forecast for adjusted earnings, but is backed up by robust and improving cash flow and balance sheet health.
Microchip Technologies’ free cash flow was sufficient to cover the dividend payment in Q1. The margin was tight but sustainable given the outlook for growth and balance sheet health. The balance sheet highlights reduced cash, current, and total assets, but the declines are offset by reduced debt and liabilities, which left the equity down only 3%.
Among the critical details is that inventory was reduced by nearly $125 million, better aligning the company with industry demand and setting it up for profitable growth.
Analysts’ Trends Align With Microchip Technologies’ Price Reversal
The analysts’ sentiment trends were a headwind for MCHP’s stock price earlier in 2025 but have shifted favorably following the Q1 release. The four revisions tracked by MarketBeat within the first week of the release include three price target increases and one decrease, with all citing margin improvements, inventory rationalization, and industry tailwinds as supportive for the market.
The market-moving detail from the analyst data is that the consensus price target, which had been trending lower, reversed course and increased relative to the prior quarter, providing some support for the market. The consensus forecasts a nearly 20% upside as of mid-August and will likely increase as the year progresses.
The Q1 results and guidance were positive despite lacking the oompf to catalyze a rally. The company reported $1.08 billion in net revenue, down 12.9% compared to last year but up nearly 11% sequentially and more than 100 basis points better than expected.
Executives are forecasting a 5% quarter-over-quarter increase, reducing the year-over-year decline to the low single digits. This suggests the business is close to returning to growth, which is expected to happen in Q3 and is likely to be strong.
Not only are results growing sequentially, but the comps will be very easy, setting the business up to grow by double-digits in the second half of its fiscal year.
MCHP Stock Price Reversal Is Underway
The price action in MCHP stock aligns with an outlook for a reversal. The price hit a long-term low earlier this year and then rebounded to exceed the long and short-term moving averages, setting the market up to complete a Head & Shoulders reversal.
The latest action shows this market retreating to test support at the 150-day EMA, which was confirmed the week after the release. The market for MCHP stock is forming the second shoulder in this scenario, set up to rebound and retest resistance at the neckline, which is near $75.
A move to $75 aligns with the consensus price target, while a move above it puts this market back into an uptrend.