Microchip Earnings Boost Broadline Chip Stocks

Sales from other segments offset reduced Huawei revenue

Microchip Technology Incorporated (MCHP) stock jumped nearly 4% Wednesday after the company posted better-than-expect earnings and hiked its quarterly dividend. The Chandler, Arizona-based chipmaker posted first quarter (Q1) fiscal 2020 adjusted earnings per share (EPS) of $1.41, surpassing analysts' expectations of $1.38. The reported figure also came in toward the higher end of management's forecast guidance range of between $1.26 and $1.49 per share.

Revenue fell slightly short of estimates but grew 9.1% from the year-ago quarter. Restricted sales to Chinese telecommunications giant Huawei Technologies Co. and negative fallout from the escalating U.S.-China trade war were offset by strength in Microchip's microcontroller business and ongoing portfolio expansion. Microcontrollers, along with analog and field-programmable gate array (FPGA), accounted for roughly 90% of the company's total revenue over the period.

Shareholders also cheered the company's decision to bump its quarterly dividend from 36.5 to 36.6 cents per share, representing a 0.3% increase. Microchip now pays an annualized dividend yield of 1.70%.

The company's ability to surpass earnings estimates and remain resilient amid ongoing challenges helped lift other broadline semiconductor stocks in yesterday's trading session. Let's take a closer look at Microchip as well as two other leading industry players and explore several trading ideas to position for further upside.

Microchip Technology Incorporated (MCHP)

With a $21.05 billion market capitalization, Microchip Technology manufactures microcontroller, analog, connectivity, and power management semiconductors, as well as FPGAs. The company's chips power a variety of electronic devices from remote controls to garage door openers to vehicle power windows. Analysts have a 12-month price target on the stock at $105.82, implying almost 20% upside from yesterday's $88.42 close. The chipmaker trades at about 14 times forward earnings, below the industry average multiple of 23. Microchip Technology stock has gained 19.29% year to date (YTD) as of Aug. 8, 2019.

Microchip shares have moved within a roughly 20-point range since March, providing both several long and short trading opportunities. The stock's two pullbacks over that period – in March and late July/early August – coincide with escalations in the trade spat between the United States and China. The most recent retracement found key support from an uptrend line stretching back to November and the 200-day simple moving average (SMA). Traders who enter here should set a take-profit order near the $100 level – an area the price may hit overhead resistance from the May and July swing highs. Think about positioning a stop beneath the low of one of the last three candles, depending on risk preference.

Chart depicting the share price of Microchip Technology Incorporated (MCHP)

Broadcom Inc. (AVGO)

Broadcom Inc. (AVGO) develops and supplies a range of semiconductor devices with a focus on complex digital and mixed-signal complementary metal oxide semiconductor-based devices. Its products provide solutions for wired infrastructure, enterprise storage, and industrial markets. The San Jose, California-based company reported Q2 EPS of $5.21 on revenue of $5.52 billion. EPS surpassed Wall Street's expectations, while revenue fell short of consensus estimates by $31 million due to lower sales in the company's semiconductor solutions and infrastructure software segments. Despite the top-line miss, revenue still grew at 10% on a year-over-year basis. Broadcom stock has a market cap of $111.87 billion, offers an enticing 3.81% dividend yield, and is trading nearly 7% higher on the year as of Aug. 8, 2019.

The chip giant's share price trended steadily higher for the first four months of the year before forming a double top between April and May. Price subsequently plunged roughly 20% toward the 200-day SMA. The stock recovered through most of June and July until sellers retook control of price action late last month. At current levels, the price finds a confluence of support from a nine-month trendline and the 200-day SMA. Those who take a trade should place a stop-loss order below $260 and aim to book profits near the double top pattern's high at $320.13.

Chart depicting the share price of Broadcom Inc. (AVGO)

Texas Instruments Incorporated (TXN)

Texas Instruments Incorporated (TXN) is the world's largest producer of analog chips, which process signals such as sound and power. The 89-year-old company also manufactures digital signal processors, used in wireless communication devices. Texas Instruments impressed investors for the June quarter, posting EPS of $1.36 versus estimates of $1.22. Moreover, the company has surpassed analysts' bottom-line forecasts for the past four consecutive quarters. Revenue also topped expectations, coming in at $3.67 billion versus a Street consensus of $3.61 billion. As of Aug. 8, 2019, Texas Instruments stock has a market value of $117.42 billion, issues a 2.53% dividend yield, and is up 30.19% YTD, outperforming the semiconductors industry average by 13.86% over the same period.

Since setting an all-time high on July 29, several days after delivering quarterly blowout results, the share price has retraced to a crucial area of support at $117.50 that provides swing traders with a high-probability entry point. Those who buy the stock should look for a retest of the all-time high at $129.60. Implement risk management by cutting losses if price closes below the Aug. 5 low at $116.22.

Chart depicting the share price of TXN.
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