TLDRs;
- Microchip forecasts weaker Q4 profit as memory shortages reduce orders globally.
- Internal manufacturing and inventory costs pressure Microchip’s profit margins despite select memory growth.
- Microchip pivots toward AI data centers and automotive, targeting long-term growth amid shortages.
- Microchip pauses share buybacks to reduce debt while navigating market and supply challenges.
Microchip Technology (NASDAQ: MCHP) saw its shares slide more than 5% in after-hours trading after the U.S. chipmaker forecast lower-than-expected profits for the fourth quarter.
Microchip Technology Incorporated, MCHP
The Arizona-based company attributed the decline to ongoing global memory shortages that have disrupted orders from major smartphone and PC manufacturers.
Weak Forecast Weighs on Investor Sentiment
Microchip now expects adjusted earnings of roughly 40 cents per share for Q4, below analyst estimates of 48 cents. Revenue projections range from $1.2 billion to $1.3 billion, narrowly surpassing forecasts of $1.2 billion. The guidance follows a third-quarter report in which Microchip posted $1.2 billion in sales and adjusted earnings of 44 cents per share, slightly exceeding analyst expectations.
The memory supply crunch, which has persisted through 2025, continues to ripple across the electronics industry, affecting chipmakers like Microchip. Reduced orders from device manufacturers have pressured margins, highlighting the challenges of navigating a market marked by both demand fluctuations and supply limitations.
Profit Margins Squeezed by Costs
Even with strong demand in certain memory segments, Microchip faces significant internal cost pressures. Executives noted that while the company is gaining share in serial EEPROM, a specialized type of memory, the overall profitability is impacted by ongoing factory underutilization and inventory accounting adjustments.
During the September quarter, these costs totaled $122.8 million, reducing non-GAAP gross margin by over 10 percentage points. In the December quarter, underutilization costs remained above $50 million, and management indicated that efforts to optimize manufacturing and inventory would continue over the next few years.
Strategic Pivot to AI and Automotive
Amid these challenges, Microchip is strategically expanding into high-growth areas. The company is sampling a 3-nanometer PCI Express Gen 6 switch for AI data centers, with three design wins that could generate over $100 million in 2027 revenue.
In automotive and industrial connectivity, Microchip is working with Hyundai Motor Group to integrate advanced Ethernet standards into next-generation vehicle platforms. These long-cycle upgrades position the company to capture demand in sectors less sensitive to short-term memory shortages.
Cautious Financial Approach: Buybacks Paused
High debt levels from the previous cycle have prompted Microchip to adopt a cautious financial approach. The company announced it would pause share buybacks to focus on deleveraging and reducing overall debt exposure. Analysts say this conservative strategy may help stabilize the balance sheet, even as near-term earnings face pressure from external market conditions.
By prioritizing debt reduction and selectively targeting high-growth segments, Microchip aims to weather the current supply crunch while positioning itself for future opportunities in AI and automotive sectors.
Bottom Line
Microchip’s stock decline reflects a broader trend in the semiconductor industry, where supply shortages and rising costs are reshaping profitability. While the company benefits from growth in specialized memory products and strategic partnerships in AI and automotive, investors are cautious as near-term earnings are impacted by ongoing supply chain constraints.
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