AI Demand Is Coming—Is Microchip Technology Ready?
It’s taking time to show in the results, but Microchip Technology (NASDAQ: MCHP) is well-positioned to benefit from long-term demand for AI.
The story in 2025 is that of end-market normalization and signs of improving momentum as the business nears a critical pivot. Revenue growth is expected to resume in the current quarter, and there is reason to believe demand trends will improve over time.
Not only have end markets normalized, but AI-focused demand is broadening into a wider array of industries that will require Microchip Technology's embedded semiconductor and power control products.
Key developments in its fiscal Q2 included the launch of new products, including the Gen 6 PCIe switch. The switch is explicitly designed to handle intense data center workloads, enabling quick communication between CPUs, GPUs, and storage devices. Initial market response is positive, and production is expected to reach commercial scale by mid-2026, with a ramp-up into year-end.
Despite near-term volatility and conservative guidance, Microchip Technology's alignment with AI infrastructure growth, operational resilience, and high institutional ownership position it for an earnings rebound and stock recovery into 2026.
Microchip Technology: Outperformance Overshadowed by Tepid Guidance
Microchip Technology reported a solid Q2, despite headwinds, with net revenue of $1.14 billion, down only 1.7% year over year. Results were driven by strengths in North America, Asia, and Europe, with the first two up sequentially and the latter flat, which execs noted as a good result given the calendar period. Data centers and AI were also cited as drivers of strength, contributing to a 6% system-wide sequential gain and a robust outlook for next year.
Executives noted that guidance was provided only for a single quarter, but then stated that strong growth was expected in the first three quarters of FY2026.
Margin news is also good. The company’s focus on operational quality, cost control, and spending helped to offset revenue deleverage and other headwinds. The net result is that margins contracted but less than expected, leaving the adjusted EPS at 35 cents, two cents better than MarketBeat’s consensus estimate.
Management also expects quality improvements to stick, setting the business up for a leveraged earnings rebound when growth resumes.
Guidance is a mixed bag. The company forecasts growth to resume in FQ3, but the guidance falls short of the consensus and soured market sentiment. Analysts, who rate the stock at a consensus Moderate Buy with a bullish bias, are lowering their price targets following the release, creating a headwind for the stock.
However, the reduction aligns with the consensus estimate, which forecasts a 25% upside as of early November. In this scenario, tepid guidance caps Q4 gains but sets the stock up for a robust rebound in upcoming quarters as growth resumes and accelerates.
The signal for investors will be the institutional activity. Institutions are bullish on this market, commanding more than 90% of the shares, but they sold on balance in October. This creates an insurmountable market force for retail investors, which is likely to persist as the quarter wears on.
The buy signal will be triggered when institutional activity reverts to accumulation, as evidenced by the price action.
Microchip’s Dividend: A Risk and an Incentive
Microchip Technology's dividend is an incentive for investors, yielding more than 3% in early November. However, it is also a risk, as it exceeds 100% of the FY2026 earnings outlook.
The offset is that the balance sheet is a fortress, capable of sustaining the payment until growth resumes, and the FY2027 forecast is substantial. It assumes earnings will grow by more than 75% to produce a 70% payout ratio, which is sustainable for this business.
Price action following the release highlights the risks. The stock dropped more than 8% to a critical support level. This level is likely to be strong given the institutional interest, but may not bounce until a potent catalyst emerges. That may not happen until early to mid-2026, unless there is movement on trade or the FOMC cuts interest rates, which could catalyze global economic activity.
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