One of the most innovative group of companies in the stock market are semiconductor companies. On average, semiconductor companies invest 16.9% of its sales on research and development as well as another 3.5% of its sales on firm specific resources. From an R&D perspective, semiconductors invests the third most if its sales on innovation behind just biotechnology and application software. Semiconductor companies also tend to have more intellectual property on its balance sheet than most other sub-industry groups. On average, semiconductors have 23.9% of its assets in intellectual property. This is the fourth highest percentage behind biotechnology, communications equipment and personal products. Over a decade ago, investors viewed semiconductors as companies that burned through a lot of cash, weren’t very profitable but had a lot of growth potential. Today, semiconductor stocks have transitioned into a more mature stage of its life cycle and offer investors investments that have tremendously liquid balances, churn out a lot of cash flow, pay a nice dividend yield and all at a reasonable multiple.
***note all data is intangible-adjusted
The stock in this group that we want to highlight today is Microchip Technology Inc. (NASDAQ:MCHP). MCHP “is a leading provider of microcontroller and analog semiconductors, providing low-risk product development, lower total system cost and fast time to market for thousands of diverse customer applications worldwide”.
MCHP invests 16.3% of its sales in R&D and another 3.8% of its sales in firm specific resources. Overall, it annually invests 2.75x as much in intangible investments as they invest in tangible (PP&E) investments.
MCHP has a very strong balance sheet with -2.7% net debt, 39.9% of its total capital in cash and 17.5% of its assets in intellectual capital. MCHP has been effective in translating its intangible investments into profits. MCHP has the 7th highest net profit margin of any developed world semiconductor at 24.2% as well as the 6th highest operating cash flow margin (53.7%) and free cash flow margin (26.3%).