2023-05-02 08:00:00 ET
Summary
- We are upgrading MaxLinear to a buy as we expect growth to resume in MXL’s broadband and connectivity businesses in 1H24.
- The stock is down 40% since we published our sell-rating back in July of last year, underperforming the S&P 500 by 44% during the same period.
- We are not constructive about MXL’s acquisition of Silicon Motion due to the near-term TAM contraction of the PC SSD market.
- We, however, believe that entry into the storage market will provide MXL with SAM expansion that will bode well for the longer-term growth of MXL.
- We recommend investors begin looking for favorable entry points into the stock as we believe MXL could begin to outperform again in 2024.
We're upgrading MaxLinear ( MXL ) to a buy after 1Q23 earnings results. While we believe MXL's financial performance could remain sanguine in 2H23, we think growth will return in its broadband and connectivity businesses in 1H24, driven by the industry upgrades after customer inventory correction. The stock is down roughly 40% since we published our sell-rating back in July of last year, significantly underperforming the S&P 500, up 4% during the same period. We believe the significantly lower-than-expected guidance for 2Q23, and FY23 is now priced into the stock. The following graph outlines our rating history on MXL.
We were previously sell-rated on MXL based on our belief that the company would not work in the near term due to demand headwinds amid a weakening macro environment. Our upgrade is driven by our belief that MXL is better positioned to outperform driven by industry adoption of its WiFi 6 and 6E access point solutions and WAV700 product family. We also believe the lull point in industry adoption of 5G has been surpassed. We now expect demand tailwinds driven by the geographic expansion of 5G networks to India and other regions. Still, we see more downside in the near term before the Silicon Motion ( SIMO ) deal closes toward 3Q23. We also expect short-term pain as inventory correction cycles complete toward 2H23. We're seeing MXL's risk-reward profile become more favorable toward the end of the year after inventory correction cycles are completed. We recommend longer-term investors begin looking for entry points into the stock.
1Q23 & Guidance
MXL stock declined after the company announced its 2Q23 guidance for net revenue of approximately $175M to $205M versus a consensus of $230M. The company reported revenue of $248.4M, up roughly 5% Y/Y missing expectations by $1.72M and Non-GAAP EPS of $0.74, beating by $0.04. Infrastructure revenue is up 46% sequentially, 40% Y/Y, industrial and multi-market revenue is up 50% Y/Y this quarter, and connectivity is up 10% Y/Y. MXL's operating expenses are down sequentially as a percent of revenue to $77.3M or 29% of revenue, compared to 31% a quarter earlier. We see the harsh demand environment persisting toward 2H23 but expect MXL is slowly rebounding toward 1H24.
The following table outlines MXL's guidance for 2Q23:
What's happening with SIMO?
MXL announced it'll acquire SIMO last May, almost a year ago today. What does this mean? MXL, a leading provider for RF, analog, and mixed-signal integrated circuits for broadband, connectivity, and infrastructure markets, would be acquiring SIMO, a leader in NAND flash controllers for SSD devices (basically, a company that manufactures SSDs for PC and smartphones data storage). Mr. Market hasn't reacted well to the acquisition, fearing that MXL may be making a mistake going ahead amid market uncertainty. We expect the acquisition will provide MXL an entry into the storage market- diversify MXL's tech platform, strengthen its position across the broadband, connectivity, infrastructure, and storage end markets, and capture end-to-end platform functionality.
We were previously extremely pessimistic about MXL's purchase of SIMO and remain cautious about the deal in the near term as we expect the acquisition will not meaningfully drive revenue growth due to SIMO's exposure to PC and smartphone sales, both of which are expected to contract this year due to weaker consumer spending. We estimate the PC Client TAM to shrink by 14-18% to 240-250M compared to 292M in 2022, while we forecast the smartphone TAM to contract by roughly 2.5% to 1.18B compared to 1.21B in 2022. Still, we believe the acquisition's downside risk is factored into the stock for the most part. Management expects the deal to go through toward 2Q23 or 3Q23, and we will continue to monitor any developments surrounding the deal.
Valuation
MXL stock is relatively cheap, trading well below the peer group average. On a P/E basis, the stock is trading at 12.4x C2023 EPS $1.96 compared to the peer group average of 22.8x. The stock is trading at 2.2x EV/C2023 Sales versus the peer group average of 5.0x. We believe MXL is undervalued but still see more downside ahead before the SIMO acquisition closes, and recommend long-term investors begin looking for favorable entry points into the stock.
The following table outlines MXL's valuation compared to the peer group.
Word on Wall Street
Wall Street shares our bullish sentiment on the stock. Of the 12 analysts covering the stock, nine are buy-rated, two are hold-rated, and the remaining are sell-rated. The stock is currently priced at $24 per share. The median sell-side price target is $40, while the mean is $39, with a potential 61-65% upside.
The following charts outline MXL's sell-side ratings and price targets.
TechStockPros
What to do with the stock
We're moving MXL to a buy as we expect the weaker demand in broadband and connectivity to have been priced into the stock for the most part. We're more constructive on MXL's growth prospects heading toward 2024. We expect revenue growth to be driven by industry upgrades after customer inventory correction and industry adoption of MXL's design wins in its WiFi 6 and 6E access point solutions and WAV700 product family. We still see some short-term pain until inventory correction cycles wrap up and the SIMO deal goes through. Hence, we recommend longer-term investors look for entry points into the stock at current levels.
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MaxLinear: Worst Is Priced In, Upgrade To Buy