Microchip Customers Still Holding Back On Chip Orders, Rebound Coming In 2026 Says Analyst
News Summary
Microchip Technology Inc. reported upbeat third-quarter results, indicating improving demand despite ongoing customer caution in inventory restocking. The company's backlog and steady booking growth signal renewed momentum in early 2026. JP Morgan analyst Harlan Sur maintained an Overweight rating on Microchip with a $77 price target. Sur highlighted Microchip's solid September quarter, with stronger-than-expected revenue and margins, even as customers delayed restocking due to macroeconomic and trade uncertainty. Revenue rose 6% quarter-over-quarter, and gross margin reached 56.7%, with bookings steadily improving throughout the quarter. Despite customers continuing to trim inventories and defer restocking until early 2026, Microchip's strong backlog provides visibility for sequential revenue growth into the March quarter and potentially through mid-2026. The analyst expects gross margins to improve as fab utilization increases, temporary cost headwinds are removed, and the Fab 2 facility sale is completed. Microchip's entry into the data center market could also provide a new growth driver starting in 2027.
Background
The global semiconductor industry is currently navigating a complex cycle, transitioning from pandemic-driven demand surges and supply chain disruptions to demand normalization and inventory adjustments in certain segments like PCs and smartphones. While emerging tech sectors such as AI and data centers show strong demand, many traditional end markets face macroeconomic headwinds, leading to customer caution in restocking. Chip manufacturers like Microchip Technology, a supplier of microcontrollers, analog, and FPGA products widely used in industrial, automotive, and communications markets, often serve as bellwethers for broader economic health and corporate capital expenditure trends. Inventory reductions and restocking delays are common phenomena in cyclical industry adjustments, and investors closely monitor when normal inventory levels and demand growth might resume.
In-Depth AI Insights
Is Microchip's projected 2026 rebound merely an inventory normalization, or does it signal a deeper demand recovery? - While analysts point to inventory rebuilding in H1 2026, the current trend of customers "trimming already-lean inventories" suggests inventory levels are near rock bottom. Thus, the rebound will likely first be driven by normalization rather than aggressive end-demand explosion. - However, Microchip's diversification across microcontrollers, analog, and FPGA products, coupled with its strategic push into the data center market, hints at a broader demand recovery once macroeconomic conditions improve. - The key will be whether future demand growth is sustained by genuine industrial upgrades, IoT expansion, and long-term AI-driven edge computing chip demand, beyond just inventory replenishment. What is the strategic significance of Microchip's entry into the data center market for its long-term risk diversification and growth prospects? - Traditionally, Microchip's business has been significantly exposed to cyclical sectors like industrial and automotive. The move into the data center market, especially with potential "meaningful upside" from 2027, helps diversify its revenue streams. - The data center market, driven by cloud computing, AI, and enterprise digital transformation, often exhibits different demand patterns compared to traditional cyclical markets, potentially offering a more stable growth trajectory for the company. - This also signals Microchip's technological prowess and market expansion capabilities into high-growth, high-value application areas, potentially attracting a broader institutional investor base. What are the key risks to Microchip's projected recovery, given ongoing macroeconomic and trade uncertainties? - Global Economic Downturn Risk: A more severe global economic downturn in late 2025 to early 2026 could further contract corporate capital expenditure, delaying or weakening the inventory rebuilding momentum. - Trade Policy Shifts: Given the incumbent US administration's protectionist inclinations, an escalation of trade tensions between the US and China or other major economies could disrupt global supply chains and semiconductor demand. - Increased Competition: As other major chip manufacturers also eye expansion into data center and AI edge computing segments, Microchip may face intense competition, and its market share expansion might not be as rapid as projected.