Knowledge Leader Spotlight: Microchip Technology Inc., a Fundamental Analysis
From time to time we illustrate our analysis of highly innovative companies in a Knowledge Leader spotlight. Today we look at Microchip Technology Inc. (MCHP), a highly innovative semiconductor manufacturer that produces programmable microcontroller products used in autos, computing and lighting, among many other applications. It also produces application development tools for microcontrollers, analog devices, timing products, memory products, and it licenses technology under trademarked brands. The firm is following a deliberate innovation strategy that can be observed and measured from a forensic accounting perspective. Key traits of most innovation strategies include a shift from tangible to intangible forms of investment, falling overall capital intensity, stable to rising profitability, the production of excess cash, and the return of that cash to shareholders in some form. We observe those highly-sought-after traits when decomposing MCHP’s financials, which make it an interesting stock from a fundamental perspective. Furthermore, even though the company may be in an operationally superior position now compared to the tech boom period of the late 1990s and early 2000s, it is selling for a fraction of the valuation.
A classic, if not required, signal that a company is following an innovation strategy is a shift in investment from tangible to intangible forms of capital. Since 2002 MCHP has cut investment as a percent of sales on physical capital by 94%.
MCHP has raised investment in R&D by 54%.
In this next chart we can see the metamorphosis in the company’s asset base. In 2007 property, plant & equipment (red line, right axis) accounted for 24% of assets versus just 9% of assets today. Intellectual property assets (blue line, left axis) have risen from 13% of the total to 17% of the total since 2007.