Story Stocks^®

  Microchip (MCHP -2%) missed EPS and sales estimates in Q3 (Dec) and guided Q4 (Mar) figures meaningfully below consensus, pushing shares to fresh 52-week lows today. The semiconductor firm was already coming off weak data, guiding Q3 (Dec) numbers below consensus in November only to lower its revenue forecast one month later.

High inventory levels continue to act as a brutal headwind. In December, MCHP decided to shut down one of its wafer fab facilities, aiming for Q2 of this year, which it anticipated would generate annual cash savings of around $90 mln. However, due to the excess inventory of products made at this facility, MCHP did not foresee savings trickling to its bottom line until the beginning of 1Q26.

• As such, earnings remain under pressure. In Q3, MCHP missed earnings estimates for the first time in over five years. Management commented that its performance reflected the need to realign its business; inventory levels reached 266 days, up from 247 days at the end of the last quarter.
• CEO Steve Sanghi, who stepped into the role just three months ago, added that even though substantial inventory destocking has unfolded across its customer base and channel partners, a correction cycle is still not over. This grim outlook is reflected in MCHP's Q4 (Mar) guidance, projecting adjusted EPS of $0.05-0.15 and revs of $0.92-1.00 bln, a 28% drop yr/yr at the midpoint.
• Where does MCHP go from here? Mr. Sanghi outlined a comprehensive turnaround strategy, touching on nine pillars that are expected to stabilize the business and return to growth. The first couple of pillars are already in motion; MCHP is closing one of its fabs and reducing capacity at two of its other fabs. Meanwhile, MCHP is working to reduce its inventory, targeting 130-150 days. Other actions include diving deep into each business unit to uncover greater efficiency, review its channel strategy, and strengthen customer relationships.

MCHP's correction was extended today following another weak quarter and concerning guidance. A troubling development for MCHP is that inventory is high across the board; no end market is unaffected. Without a clear timeline on when the company anticipates carving out a bottom or when a recovery might ensue, investors are steering clear. This trend could persist until further clarity from MCHP is provided.