Microchip's Data Center Revenue Grew 98% Last Quarter. Here's Why It's Guiding to $1 Billion for the Year.

Microchip Technology (NASDAQ: MCHP) built its business on microcontrollers (the small, inexpensive chips that run factory equipment and cars). So it may come as a surprise that the company's fastest-growing end market right now is the data center.

On the company's Aug. 6 earnings call, management said data center revenue grew 97.8% year over year in the fiscal first quarter, after growing 77% in the quarter before. And the company now expects its total data center portfolio to reach about $1 billion in calendar 2026, up 69.3% from last year.

Investors noticed. Shares of the microcontroller specialist jumped about 14% on Friday to about $85, capping a week in which it reported a quarter that was strong well beyond the data center.

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A sharp snapback

Microchip is climbing out of one of the deepest downturns in its history, and the fiscal first quarter of 2027 (the period ended June 30, 2026) showed the recovery gaining speed. Net sales rose 38% year over year to $1.485 billion, up 13.2% sequentially and above the high end of management's guidance.

The profit recovery is even sharper, because so many of Microchip's costs are fixed. Non-GAAP (adjusted) gross margin came in at 63.8%, up from 61.6% the quarter before. Adjusted earnings per share were $0.76, up 181.5% from $0.27 a year earlier.

And on a GAAP basis, the company swung to net income of $202 million from a loss of $46.4 million in the year-ago period.

The signals behind the numbers point in the same direction. Inventory days fell from 185 to 175 during the quarter, and bookings ran ahead of shipments. The company also cut its net debt by about $170 million and paid out $246.9 million in dividends.

Management expects the momentum to continue into fiscal Q2. "We expect net sales for the September quarter to be up sequentially between 7% and 9%, which at the midpoint would represent year-over-year growth of approximately 40.6%," CEO Steve Sanghi said in the earnings release.

Data center is becoming a second business

The recovery explains the quarter. The data center explains why this could be more than a cyclical rebound.

Microchip's $1 billion calendar-2026 forecast splits into two roughly equal halves. About $500 million should come from its Data Center Solutions unit, which makes products exclusively for data centers: PCIe switches and retimers, storage controllers, and memory controllers. That unit generated $302.7 million in calendar 2025, and management expects about 65% growth from it this year.

The other half comes from Microchip's catalog products (the power-management and timing chips, security products, and microcontrollers it already sells everywhere) being sold into data centers as well. All told, the company says its broader data center and compute end market already represents about 18% of total revenue.

What's more, the design-win pipeline suggests the growth has legs. Microchip said its PCIe Gen 6 connectivity design wins doubled sequentially, from six programs at the end of the prior quarter to 12 exiting the fiscal first quarter. Those wins should turn into revenue as customers' systems ramp over the next couple of years.

Sure, $1 billion would still be a minority of what should be roughly $6 billion in annual sales. But that piece of the business is growing about 69% a year, attached to the artificial intelligence (AI) data center build-out. It could change the company's growth profile -- especially when Microchip's core industrial and automotive markets move with the economy rather than ahead of it.

Two very different multiples

The stock's valuation captures the transition. Measured against the past year's GAAP earnings, still depressed by the downturn, the stock costs well over 100 times earnings. Measured against what's expected over the next 12 months, it costs about 21 times. The gap reflects how quickly profits are rebuilding as revenue returns and factories refill.

That 21 times forward earnings is the price of believing the recovery continues on schedule. The September-quarter guidance suggests it does, and the dividend ($1.82 per share annualized, a 2.15% yield) gets paid while investors wait.

So the quarter made two separate cases. The cyclical case is sales up 38% with margins expanding. The structural case is a data center business growing fast enough to double in well under two years, inside a company the market still thinks of as an industrial chip supplier. The first case is what Friday's 14% jump paid for. The second is the one I'll be watching from here.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.