Piper Sandler analysts upgraded Microchip Technology (NASDAQ:MCHP) to Overweight, citing the potential for multiple growth drivers to kick in soon.
The analysts highlighted that MCHP’s gross margins are likely to see significant improvement as the company’s recent challenges—such as underutilization and inventory reserve charges—begin to ease and reverse. According to Piper Sandler, the company’s earnings may currently be at a low point due to the full brunt of these charges over the past few quarters, suggesting better times ahead.
Microchip’s product technology is also viewed as particularly well-positioned within the automotive and industrial sectors, which is expected to lead to positive results for the company in its December guidance. Piper Sandler noted that MCHP appears to be lagging behind its analog peers in terms of recovery, presenting an opportunity for the stock to catch up.
Two primary factors are expected to drive Microchip’s gross margin improvement over the coming quarters. First, as revenue and utilization levels pick up, underutilization charges are set to decline. This could push margins to 65% by the end of fiscal year 2026, compared to a recent low of 59% in the September quarter. Second, the impact of inventory reserve charges is expected to diminish as the business environment strengthens. These charges, which amounted to $33 million and $20 million in the March and June quarters respectively, are predicted to become tailwinds, further boosting margins as market conditions turn more favorable.