Internet Service Providers (ISPs) such as Komcast (CMCSA -1.70%) and Charter Communication (CHTR -1.67%) recently discussed multi-year plans to upgrade their Internet infrastructure. The result will be faster Internet download and upload speeds for homes and businesses, both in cities and rural areas of the United States
All of this might sound like a reason to invest in Comcast or Charter, but these internet service upgrades are largely in response to 5G cellular networks (which U.S. carriers have to offer as a form of home internet service), fiber internet service expansion in urban areas areas and even satellite-based internet. Therefore, Internet infrastructure for ISPs is less of a growth project and more of a “keep up with the Joneses” scenario.
But there’s one stock that could be a big beneficiary of the upcoming Internet infrastructure upgrade cycle — tiny chip designers MaxLinear (MXL -0.65%). Here’s what you need to know.
A full suite of internet-enabled chips
Perhaps your first acquaintance with MaxLinear was news that it was looking to acquire another chip design house silicon movement (SIMO -0.70%) in May 2022. That was big news that could be crucial for MaxLinear, but as I wrote a few weeks ago, there are doubts as to whether a collaboration between the two companies can happen.
However, that doesn’t mean that MaxLinear doesn’t deserve attention. This small company alone (current market cap of just $2.9 billion) has some interesting things going for it. While management doesn’t give specific numbers, the biggest end market is internet infrastructure — things like network gateway processors, cable and fiber control chips, Ethernet, 5G network backhaul equipment, and some data center components.
MaxLinear also has wireless connectivity devices that power next-generation Wi-Fi 6, 6E, and eventually (perhaps by late 2023) Wi-Fi 7 routers. Home and business Wi-Fi upgrades have been a hot trend during the past few years during the pandemic. MaxLinear’s Wi-Fi revenue has reportedly doubled in 2022 and is on track to reach $200 million in revenue in 2023 (MaxLinear is expected to have approximately $1.1 billion in revenue in 2022). earn dollars, making the Wi-Fi business a significant growth driver).
If you’re trying to make a comparison, you might think of MaxLinear as a mini Broadcom (AVGO -0.85%) — which in particular is a huge competitor indeed. However, MaxLinear doesn’t have the smartphone chip business like Broadcom, nor does it pay a dividend.
2022 should end on a high note for this small chip shop. The company’s fourth-quarter 2022 outlook (reported Feb. 1) implies full-year growth of about 26% over 2021 — capping an epic run for MaxLinear in recent years.
Data from YCharts.
How long can MaxLinear expand?
Despite an outstanding year, MaxLinear’s stock was punished by the market. Shares are down a little over 50% since early 2022. Why Are Investors So Wary of This Growth Stock?
We can blame the bear market for part of the problem. MaxLinear has been turning profitable on a GAAP basis for the past few years, and in early 2022, its shares were trading at a steep price — nearly 50 times trailing-12-month free cash flow. There is nothing better than taking care of it. As of this writing, the stock trades at 24 times trailing 12-month GAAP earnings per share and a little over 10 times trailing 12-month free cash flow.
But there are other problems besides the bear market. The problem, in my opinion, is twofold. First, if (and this is a big if, in my opinion) MaxLinear gets the green light to acquire its competitor Silicon Motion, it will have to incur significant debt. The market appears to be discounting this deal that may happen, although MaxLinear says the merger with Silicon Motion will immediately increase margins and create additional operational efficiencies (such as the ability to strengthen its relationship with chip fabrication partners such as Taiwan semiconductor manufacturing (TSM 0.54%)).
Second, Wall Street analysts seem to believe that a standalone MaxLinear will deliver much flatter growth going forward. The median revenue forecast implies growth of just 3% in 2023. That forecast is likely being driven by the current downturn across the chip industry, though many enterprise-focused companies (like MaxLinear) have claimed they should be much better off than those hard-hit Consumer electronics part of the chip market. For the record, MaxLinear has not yet provided a concrete forecast for 2023.
A gloomy outlook is currently preventing me from taking a position at MaxLinear.
However, if the company can at least maintain its market share gains over the past two years or so, it looks like this stock could be very cheap right now. Internet infrastructure and Wi-Fi upgrades could cost ISP companies like Comcast and Charter (and their customers) billions of dollars over the next few years, giving MaxLinear plenty of opportunities to expand. MaxLinear stock is on my watch list for 2023.
Nicholas Rossolillo and his clients have positions at Broadcom and Comcast. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Comcast. The Motley Fool has a disclosure policy.
