We think that Microchip Technology Inc. (NASDAQ: MCHP) is currently a better bet of semiconductor technology compared to Texas Instruments Incorporated (NASDAQ: TXN). MCHP shares trade at 8.1x trailing earnings, lower than TXN, whose P/S multiple is 10x. Does this gap in corporate valuations make sense? We don’t think so and expect Microchip Technology to fill that gap. Although the two companies have not been significantly hampered by the pandemic, MCHP has seen faster sales growth over the past five years than TXN. Microchip’s revenue has grown nearly 2x since fiscal 2017 (MCHP’s fiscal year ends March) and currently stands at $6 billion on an LTM basis. Meanwhile, TXN’s sales grew from $13.4 billion in fiscal year 2016 to $15.8 billion in fiscal year 2018, before declining to around $14.5 billion. dollars in FY20. However, Texas Instruments sales have since recovered and currently stand at $17.6 billion on an LTM basis. For more details on TXN earnings and peer comparison, see Texas Instruments Incorporated (TXN) revenue comparison.
That said, we dig deeper into the comparison, which makes Microchip Technology a better bet than Texas Instruments, at these valuations. Let’s step back to examine the fuller picture of the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating profit growth and financial condition, combined with expected returns. Our Dashboard Microchip Technology vs. Texas Instruments: Industry Competitors, But Microchip Technology Is a Better Bet has more details on this. Parts of the analysis are summarized below.
1. Microchip Technology ahead of revenue growth
Microchip Technology has experienced much faster and more consistent revenue growth over the years. MCHP sales grew from $3.4 billion in fiscal year 2017 to $6 billion on an LTM basis, while Texas Instruments experienced more erratic growth during this period, with sales n growing just 30% from $13.4 billion in fiscal year 2016 to $17.6 billion currently. .
Additionally, MCHP’s pre-Covid annual sales growth is 20.4%, multiples higher than TXN’s 2.8%, but growth during Covid is slightly lower at -1.4%, compared to Marginal 0.5% TXN. However, a review of recent trends reveals that Microchip recorded sales growth of 26% YoY and 5.1% QoQ for its latest quarter (Q2 22), compared to 21.6% and 1.4% respectively for TXN.
Finally, sales growth for the last three years for Microchip amounts to 12%, much more than -0.9% for TXN.
2. EBIT margins and financial situation: Texas Instruments in the lead
Microchip’s P/EBIT ratio is currently around 48x, more than double TXN’s 21.3x. However, Microchip’s LTM EBIT margins currently stand at 17%, well below TXN’s 47%, and Microchip is also slightly behind in LTM margin change over the last three years, with growth of 4.3% versus 6% for TXN.
Additionally, Microchip’s debt as a % of equity currently stands at 17.2%, much higher than TXN’s 4.4%. TXN also leads in terms of cash as % of assets, with 42%, well above Microchip’s 1.6%. However, these numbers can be attributed to the fact that Microchip is still in its growth phase, compared to Texas Instruments, a more stable company (as shown by the gap in revenue growth numbers).
For more details on Microchip’s historical returns and comparison with its peers, see Microchip Technology (MCHP) stock performance.
3. Finally, Microchip is ahead of expected returns
Using P/S as a base, due to the large swings in P/E and P/EBIT, we believe Microchip is the best choice. Microchip’s LTM revenue of $6 billion is expected to grow at a CAGR of nearly 19% according to our estimates, bringing three-year revenue figures to $10 billion. Assuming Microchip’s P/S ratio drops to around 6x, that still means the market capitalization would hit $62 billion, up nearly 30% over three years.
By comparison, given historical trends, we expect Texas Instruments’ sales to grow more slowly at a CAGR of just 1.6%, bringing revenue in three years to just over $18 billion. However, given Texas Instruments’ P/S falling at a slower pace at 9x, we still estimate a market cap of $168 billion for Texas Instruments, about 5% lower than its current level.
The fillet of everything
Although Texas Instruments’ revenues are higher than Microchip’s, the latter has experienced faster and more consistent revenue growth lately, but is still in the growth phase and has much lower margins than Texas Instruments. That said, our post-Covid recovery comparison above shows that Microchip has had stronger sales growth than Texas Instruments, and we believe profitability will catch up soon enough. For this reason, we believe Microchip deserves a higher P/S multiple, and expect MCHP to close the current valuation gap between the two companies. As such, we believe Microchip Technology stock is currently a better bet relative to Texas Instruments stock.
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|S&P 500 return||-1%||-1%||110%|
|Performance of the Trefis MS portfolio||-6%||-6%||271%|
 Month to date and year to date as of 9/1/2022
 Cumulative total returns since the end of 2016