2024-01-16 21:32:26 ET
Summary
- MaxLinear Inc's stock price has fallen over 40% in the past year, reflecting a decline in revenues and expectations of growth.
- The company specializes in communications systems-on-chip solutions for various markets, with broadband being a significant growth opportunity.
- MXL's recent earnings report showed a significant decrease in revenues, and the company's valuation appears inflated, making it a risky investment.
Investment Rundown
The last 12 months have not been kind to MaxLinear, Inc. ( MXL ) stock price as it's down over 40%. The company is not that large with a market cap of $1.7 billion, but it seems the reality has caught up to the valuation and expectations of growth. In 2022 the company set record revenues of $1.12 billion, but 2023 seems to be a year with revenues just over half of that amount.
The company has exposure to some very attractive markets that could help serve strong growth over the next several years, but it seems the company has lost some of the momentum it had going into 2022. Higher interest rates have of course impacted the spending of customers to MXL but I wouldn't have expected the top line to fall nearly 50% YoY because rates went up the way they did. This makes the MOAT of MXL come into question and whether you are better off investing in the semiconductor space by going with a bigger and more well-established company instead, NVIDIA Corporation ( NVDA ) and Intel Corporation ( INTC ) come to mind. The last report hasn't convinced me that MXL is a buy despite the significant decline in share price. I am covering the stock for the first time and will initiate by rating it a hold.
Company Segments
MXL specializes in delivering cutting-edge communications systems-on-chip solutions that cater to diverse global applications. With a focus on the connected home, wired and wireless infrastructure, and industrial and multi-market sectors, the company's products seamlessly integrate key elements of high-speed communication systems. MXL offerings encompass everything from radiofrequency, high-performance analog, mixed-signal, digital signal processing, security engines, data compression, networking layers, and power management. The products that the company makes are used in a variety of markets, but some notable are broadband which the company sees as one of the biggest growth opportunities.
In FY2020 the market for industrial that MXL could serve was around $1.8 billion, and will by this year have grown to $2.1 billion in total. But what is perhaps the most notable level of growth is the broadband and connectivity markets. The global broadband market is expected to see quite steady growth of 4% annually until 2028 and I think MXL could capture that. In a presentation by the company, they note that the fiber gateway market is possible to achieve a CAGR of 7% by 2030 and is a part of the broader secular trend of increased invesmtntes into broadband.
Earnings Highlights
The last few quarters have been difficult for MXL as the demand has been lacking following rising rates. When we take a closer look at the income statement for Q3 released on October 25, the revenues fell by over 50% YoY and nearly 30% on a QoQ basis. This is not the type of trend you want to be seeing with a company made out to be a growth story. In recent weeks there have been further headwinds like the downgrade the company received by Wells Fargo. We are not that far off from the next earnings report by the company and I think what is on most investors' minds is how the company is grappling with building back demand. The report is set to be released on January 30 and I think buying into that would be a mistake, or at least too risky for my preference. I have the company as a hold because I still see a lot of potential in the products and services they provide. What has me worried is the seasonality of the company and its earnings. The company's core markets are valued at $7 billion, but that doesn't matter if MXL can't build up a strong MOAT.
Let's take a look at the valuation a little more. The title of the article summarizes what I think has happened in the last few quarters. The market has realized that MXL can't grow at the same levels as it has done before, and that means the price needs to be adjusted a little as well. Back in 2020, the p/s for the company was over 7x which is incredibly high when you consider that the market it's in only trades at an average of 2.8. Since then the revenues have grown well which has helped push down the p/s further, but recently the revenues have fallen which has made the company look expensive once again. With faltering revenues and EPS like the last quarter has shown I would certainly not pay a premium for the stock, and I would the opposite prefer a near 30% discount to the sector when the situation is like this. For the p/s that means a multiple of 1.99. I think 2024 won't produce a significant recovery for the top line and for revenues to land at around $600 million. That would go in line with the last few QoQ decreases MXL has had. I do think dilution will accelerate somewhat this year too, and by the end of the year to land at 84 million outstanding . M y estimated revenues for MXL mean a revenue per share of $7.14 and a 1.99 multiple gets us a price target of $14.2. Now, MXL trades at around $21 per share which means I see the downside as quite significant here, but keep in mind, that I have this low price target to get what I think is a good margin of safety and discount. Everyone's risk profile is different, and I tend to have quite a conservative one. Why I also don't rate MXL a sell here is that the next earnings report has a slight chance of producing decent numbers and if the commentary by the management is positive we might see the stock rise. I don't want to miss out on that which is the reason for the hold.
Risks
MXL presents some risks related to its vulnerability to higher interest rates. The noteworthy decline in revenues during 2023 aligns with the trend of rising rates. Management attributes the recent quarters' challenges to customers exercising greater capital discipline, leading to subdued demand. I don't think this paints the full story of MXL right now. The persistent threat lies in the scenario where interest rates remain elevated, contributing to MXL's struggle with lackluster growth figures. This situation raises concerns about the current valuation appearing somewhat inflated if the company fails to navigate the headwinds of higher rates and spur improved growth. There have been plenty of companies in the stock market that have still seen strong growing numbers. Frontier Communications Parent, Inc. ( FYBR ) for example is a company that works with similar markets as MXL but has not seen the same 50% drop in revenues as MXL. FYBR is a far larger company and its position in the market has likely made it less affected by higher interest rates.
The last risk factor that I think is worth mentioning as well is in regards to the share dilution that MXL has done over the past years. It has even with the growth in 2021 and 2022 not stopped, although notably slower then in earlier years. A large portion of the expense for MXL lies in the R&D they do, nearly $280 million was spent on the TTM. This is an area that has gone up very quickly in the past years, and with it being hard to decrease as well has led to the first negative bottom line for MXL since 2020. If they can't pick it up here and raise the NI then the share price could falter once the next earnings report is released. This is one of the supporting reasons for me not suggesting a buy here, there is just too much progress that MXL has to make in a short period to justify its current price point.
Final Words
MXL has had a turbulent last 12 months as the top line has fallen quickly because of a lack of demand in the industry. Rates will likely stay elevated this year and decline more rapidly in 2025, depending on the results of the fight against inflation of course. MXL has very high R&D expenses which has been a key factor for the negative TTM NI it has. I don't see a strong recovery in 2024 for the company and the risks of further dilution and stock price downside remove any thoughts of a buy here. I will still rate the stock as a hold as over the long term it remains a decent opportunity.
For further details see:
MaxLinear: Reality Has Set In For Its Valuation