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Microchip Technology (NASDAQ:MCHP) and On Semiconductor (NASDAQ:ON) were downgraded by Morgan Stanley on Wednesday due to valuation concerns and issues related to the automotive industry.
Shares fell 2% and 2.2% respectively, in extended trading.
While Microchip has only gained 11% year-to-date, far below some of its peers, the valuation reflects “loft expectations,” analyst Joseph Moore said. Microchip also is likely to see a slower pace of deleveraging due to a “heavy balance sheet,” Moore added.
Moore lowered his rating on Microchip to Equal-Weight from Overweight and slightly tweaked his price target to $100 from a previous $102.
Phoenix, Az.-based On Semiconductor is still dealing with headwinds across automotive, in areas such as silicon carbide and image sensors, Moore said. As such, there is “limited room” for multiple expansion. Moore lowered his rating for On Semiconductor to Underweight from Equal-Weight and cut his price target to $65 from $70.
The broader analog segment of the semiconductor market is unlikely to see a “standout name” in the current upcycle, though their earnings multiples are justified, Moore said.
“Analog trades at a 50% multiple premium to history, in-line with SOX, which looks reasonable given through-cycle margin expansion and consolidation,” Moore wrote.
Analysts are largely bullish on Microchip (MCHP). It has a BUY rating from Seeking Alpha authors, while Wall Street analysts rate it a BUY. Conversely, Seeking Alpha’s quant system, which consistently beats the market, rates MCHP a HOLD.