Internet service providers (ISPs) such as Comcast (CMCSA -1.70%) And Communication charter (CHTR -1.67%) Recent multi-year plans to upgrade the Internet infrastructure. The result will be faster Internet download and upload speeds for residences and businesses, both in urban areas And rural areas in the United States
All of this might seem like a reason to invest in Comcast or Charter, but these internet service upgrades are largely in response to 5G mobile networks (which US carriers are trying to offer as a kind of home internet service), fiber optic internet expansion in urban areas, and even the Internet. via satellite. Thus, Internet Infrastructure is not a growth attempt for ISPs, but more of a “keeping up with the neighbours” scenario.
But there is one stock that could be a huge beneficiary of the upcoming Internet infrastructure upgrade cycle – the small chip designer Max Liner (MXL -0.65%). Here’s what you need to know.
Complete set of internet-enabled chipsets
Your first introduction to MaxLinear may have been the news that it would be trying out a fellow chip design house Silicon movement (Simo -0.70%) in May 2022. This was big news that could be a game-changer for MaxLinear, but as I wrote a couple of weeks ago, there is doubt that the partnership between the two companies can continue.
That doesn’t mean MaxLinear doesn’t deserve some attention, though. This small company on its own (current market cap is just $2.9 billion) has some pretty interesting things going for it. While the department doesn’t provide specific numbers, its largest market is Internet infrastructure — things like network gateway processors, cable and fiber control chips, ethernet, 5G backhaul equipment, and some data center components.
MaxLinear also has wireless equipment running Wi-Fi 6, 6E, and eventually (possibly starting in late 2023) next-generation Wi-Fi 7 routers. Home and business Wi-Fi upgrades have been a hot trend in the past couple of years while epidemic. MaxLinear’s Wi-Fi revenue has reportedly doubled in 2022 and is on track to surpass $200 million in sales in 2023 (MaxLinear will generate about $1.1 billion in sales in 2022, so the Wi-Fi business is a great growth engine) .
If you’re trying to do a comparison, you might think of MaxLinear as a mini from Broadcom (AVGO -0.85%) – And he is already a giant competitor. However, MaxLinear does not own the smartphone chip business that Broadcom does, nor does it pay a dividend.
2022 should close well for this small chip business. Forecasts for the fourth quarter of 2022 (which will be reported on February 1) point to full-year growth of about 26% over 2021 and beyond — capping MaxLinear’s epic run of the past few years.
How long can MaxLinear’s expansion last?
Despite the stellar year, MaxLinear shares have been punished by the market. Stocks are down just over 50% since the start of 2022. Why are investors concerned about this growth?
We can blame the bear market for part of the problem. MaxLinear has just become profitable on a GAAP basis in recent years, and at the start of 2022, shares were trading at an exorbitant price — nearly 50 times plus 12 months’ free cash flow. There is nothing like a reckless market to take care of that. The stock now trades for 24 consecutive times 12-month GAAP earnings per share, and just over 10 times 12-month free cash flow, as of this writing.
But there are other issues besides the bear market. The problem, in my opinion, is twofold. First, if MaxLinear is given the green light to acquire its Silicon Motion counterpart (which is a big if in my opinion), it’s going to need to take on significant debt. The market appears to be discounting the possibility of this deal happening, though MaxLinear says a merger with Silicon Motion would immediately boost profit margins and create additional operating efficiencies (such as the ability to leverage its relationship with fab partners like Taiwanese semiconductor industry (TSM 0.54%)).
Secondly, Wall Street analysts seem to believe that the standalone MaxLinear will project more steady growth in the future. Median revenue forecasts point to growth of just 3% in 2023. This forecast is likely driven by the current downturn in the chip industry in general, although many enterprise-focused companies (such as MaxLinear) have stressed that they should To be much better than the consumer electronics that have been hit hard by the chip market. For the record, MaxLinear hasn’t provided any specific guidance for 2023 yet.
The cloudy outlook keeps me from taking a stand at MaxLinear for now.
However, if the company can at least hold on to its market share gains from the past two years or so, this stock looks like it could be very cheap right now. Internet infrastructure and Wi-Fi upgrades could cost ISPs like Comcast and Charter (as well as their customers) billions of dollars over the next few years, providing plenty of avenues for MaxLinear to expand. MaxLinear stock is on my 2023 watchlist.
Nicholas Rosolillo and his clients hold positions at Broadcom and Comcast. The Motley Fool has positions in and recommends Taiwanese semiconductor manufacturers. The Motley Fool recommends Broadcom and Comcast. The Motley Fool has a disclosure policy.