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Microchip Warns about Coronavirus Risk, Cuts Guidance

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Microchip Technology (NASDAQ:MCHP) lowered its revenue guidance on Tuesday due to the coronavirus risk. As a result, the stock fell over 6% on Tuesday. The company is concerned about how the coronavirus outbreak could weigh on its fourth-quarter revenues.

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Microchip and broader markets in the red

Microchip stock fell 6.1% and closed the trading day at $89.41 on Tuesday. At the closing price, the company’s market capitalization is around $21.4 billion. The stock is trading 20.5% lower than its 52-week high of $112.47 and 15.1% higher than its 52-week low of $77.66.

Amid the growing coronavirus risk, the Fed decided to loosen its monetary policy to boost the economy. On Tuesday morning, the Fed slashed its interest rate by half a point. Now, the range is 1.00%–1.25%. However, the rate cut might not reduce investors’ concerns. On Tuesday, all three of the major stock indexes closed in the red amid coronavirus fears. The Dow Jones Industrial Average lost around 786 points or 2.94%. The S&P 500 also fell about 2.81%, while the tech-driven Nasdaq Composite Index fell by 2.99%.

Lower revenue guidance amid coronavirus fears

The company warned investors about the coronavirus outbreak. Microchip revised its outlook for the fourth quarter of fiscal 2020. The company expects the March-ending quarter’s sales growth to be flat for the fiscal fourth quarter.

Microchip Technology is also witnessing weak demand in Asia, especially in China, due to the coronavirus epidemic. The company said that employees are returning to work at a slow pace. To help contain the virus, Microchip imposed an employee travel ban to and from the highly-affected regions. Right now, China, Hong Kong, Korea, Italy, Singapore, Iran, and Thailand have been impacted the most.

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Last month, Microchip delivered upbeat results in the third quarter of fiscal 2020. The company reported an adjusted EPS of $1.32 in the third quarter of fiscal 2020, while its sales were $1.29 billion. Microchip expects a fourth-quarter EPS of $1.32–$1.20. Notably, the projected fourth-quarter earnings were lower compared to $1.48 reported in the same quarter the previous year.

Despite a slowdown in the Chinese economy due to the US-China trade war, Microchip Technology gained from strong demand for memory and analog products.

Coronavirus pressures other tech giants

Like Microchip, chip supplier Qorvo (NASDAQ:QRVO) has also warned about the slowdown in China due to the coronavirus. On Tuesday, Qorvo slashed its sales outlook for the March-ending quarter to about $770 million. Earlier, the company gave revenue guidance of $800 million–$840 million for the fiscal fourth quarter.

NXP Semiconductors (NASDAQ:NXPI) also cut its first-quarter sales outlook. Other tech companies including Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Nvidia issued slowdown warnings amid the outbreak.

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Analysts’ expectations

For the fourth quarter, analysts expect Microchip’s sales to decline by 2.3% YoY. Wall Street analysts expect the company’s fiscal 2020 sales to fall by about 4.08% YoY. In comparison, the fiscal 2019 sales growth was 37.6%. Microchip’s sales will likely grow by 7.5% YoY in fiscal 2021.

Wall Street analysts expect the company’s adjusted earnings to fall by 11.8% YoY for the fourth quarter. Analysts expect the fiscal 2020 EPS to decline by 16.3% YoY. Meanwhile, analysts expect earnings growth of 16.3% YoY in fiscal 2021.

Analysts’ recommendations and target price

Among the 22 analysts covering Microchip stock, 19 recommend a “buy,” while three recommend a “hold.” None of the analysts recommend a “sell.” As of Tuesday, analysts have given the stock a 12-month average target price of $119.89, which is at a 33.3% premium to Tuesday’s closing price.

Microchip’s technical levels

Microchip’s 14-day RSI (relative strength index) score is 32.91, which indicates that investors are neutral on the stock. However, investors are in a selling mode for the stock.

Microchip stock also closed near its Bollinger Band lower range level of $88.48 on Tuesday. The value indicates that the stock is in “oversold” territory.

Looking at analysts’ projections and technical indicators, I think that Microchip stock has limited upside in the near term due to the coronavirus epidemic.

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