Wide-moat Microchip Technology MCHP reported decent fiscal 2024 second-quarter results but provided investors with a gloomy forecast by guiding to its worst sequential revenue decline in at least a decade, and likely since the credit crisis. We don’t believe business conditions have deteriorated to levels seen during that panic. We attribute the revenue shortfall to inventory digestion after a couple of years of tremendous growth, as customers rushed to place orders with Microchip (many of which were part of its noncancellable customer program). While we expect this inventory correction to damp results in the near term, we consider Microchip to be particularly adept at navigating industry cycles, and we often find downturns to be attractive buying opportunities for patient investors with a long-term time horizon. We maintain our $90 fair value estimate, and we view the shares as undervalued.

Revenue in the September quarter was $2.25 billion, up 9% year over year, down 2% sequentially, and slightly below the midpoint of guidance. Demand was weak across end markets and geographies, aside from the United States, which was up 2% sequentially. Given the broad-based slowing of demand, Microchip said it is working with its channel partners and customers to push out backlog in order to rightsize inventory levels. With this, the firm expects to be well positioned when business conditions eventually strengthen. Despite revenue headwinds, adjusted gross margin remained resilient and flattish sequentially at 68.1%, as did adjusted operating margin at 48.1%.

In the December quarter, Microchip expects revenue to be $1.86 billion at the midpoint of guidance, down 14% year over year (as opposed to 9% growth in September) and a whopping 18% sequentially. Management expects the lower sales to cause adjusted gross margin and adjusted operating margin to fall to 64.5% and 41.5%, respectively.