MACOM Stock Looks Fine Except For One Hurdle (NASDAQ:MTSI)

MACOM Technology Solutions Holdings, Inc. (NASDAQ:NASDAQ:MTSI) struggled in the first half of 2022, but the second half has been much better thus far. The downtrend from earlier in the year appears to have morphed into an uptrend. Some may find encouragement in the recent change in trend and double down on MTSI for that reason. Others, however, may still be hesitant to place their bets on MTSI. Why will be covered next.

The trend has changed for MTSI

The first six months of 2022 are unlikely to be remembered fondly by whoever is long MTSI. The stock continued to hit new lows in the first half, as can be seen in the chart below. So much so that the lows can be connected to form a descending trendline, leaving no doubts as to the prevailing trend. The stock had lost as much as 44% of its value by the time the second half of the year got underway.

However, the second half of the year has been something else with the stock gaining 25% thus far, narrowing losses for the year to a more conservative 27% YTD. Gains reached as high as 40% at one point, before the stock pulled back. Unlike the first half when the trend pointed down, the trend in the second half seems to be up. The trend seems to have shifted from bearish to bullish, something that is likely to attract interest, especially from those who like to keep track of the prevailing trend.

In fact, the charts appear to be in the process of forming what could be described as an ascending channel, a bullish chart pattern. Such a channel is bounded by two ascending trendlines running parallel to one another. In an ascending channel, the upper trendline is defined by a series of higher highs and the lower trendline is defined by a series of higher lows. Both trendlines are trending higher, making it relatively easy to guess in which direction the stock is most likely heading next, something people may want to take advantage of. That is, provided the channel remains intact.

Growth remains solid

It’s easier to get people onboard if a company shows solid growth. MTSI gets a checkmark in that regard. In fact, MTSI continues to extend the expansion that started several years ago. For instance, Q3 revenue increased by 4.3% QoQ and 12.9% YoY to $172.3M, making it the 12^th consecutive sequential increase in revenue. The last time quarterly revenue did not increase QoQ was three years ago in Q3 FY2019.

The current expansion is likely to continue with book-to-bill above one in Q3, the seventh consecutive quarter this has happened. In terms of end markets, Industrial & Defense contributed $75.5M, Telecom contributed $62M, and Data Center contributed the remaining $34.8M to total revenue. Double-digit growth in the top line in combination with triple-digit improvements in margins helped grow the bottom line.

GAAP EPS increased by 114.3% YoY to $0.45 and non-GAAP EPS increased by 28% YoY to $0.73. Note that GAAP earnings in Q3 FY2021 were negatively affected by non-operating expenses, skewing the YoY comparisons for net income and EPS. These expenses are not included in the non-GAAP numbers. The balance sheet got better as well. Cash, cash equivalents and other short-term investments reached $536.3M, an increase of $33.3M QoQ, which mostly offsets $603M in debt. The table below shows the numbers for Q3 FY2022.

(GAAP)	Q3 FY2022	Q2 FY2022	Q3 FY2021	QoQ	YoY
Revenue	$172.259M	$165.147M	$152.622M	4.31%	12.87%
Gross margin	60.7%	59.9%	57.2%	80bps	350bps
Income from operations	$36.003M	$32.571M	$23.674M	10.54%	52.08%
Net income	$32.234M	$29.558M	$15.005M	9.05%	114.82%
EPS	$0.45	$0.42	$0.21	7.14%	114.29%
(Non-GAAP)
Revenue	$172.259M	$165.147M	$152.622M	4.31%	12.87%
Gross margin	62.2%	61.7%	60.3%	50bps	190bps
Income from operations	$54.111M	$50.893M	$43.862M	6.32%	23.37%
Net income	$52.080M	$48.364M	$40.296M	7.68%	29.24%
EPS	$0.73	$0.68	$0.57	7.35%	28.07%

Click to enlarge

Source: MTSI Form 8-K

The outlook sees a continuation of the current expansion. Guidance calls for Q4 FY2022 revenue of $175-180M, an increase of 3% QoQ and 14% YoY at the midpoint. The forecast expects non-GAAP EPS of $0.74-0.78, an increase of 4% QoQ and 25% YoY at the midpoint. Margins will be higher as well.

Based on Q4 guidance, FY2022 revenue is projected to end up at $672-677M, an increase of 11% YoY at the midpoint, which is not far from the 10+% predicted at the start of FY2022. It also brings MTSI closer to reaching the long-term goal of $1B in annual revenue by FY2025. FY2022 non-GAAP EPS is projected to end up at $2.79-2.83, an increase of 31% YoY at the midpoint.

(Non-GAAP)	Q4 FY2022 (guidance)	Q4 FY2021	YoY (midpoint)
Revenue	$175-180M	$155.2M	14.37%
Gross margin	61.5-63.5%	61.1%	140bps
EPS	$0.74-0.78	$0.61	24.59%

Click to enlarge

There are headwinds lurking out there

MTSI is doing fine, but it acknowledges there are potential problems out there. For instance, there are growing concerns about a global recession and what that could mean for demand. Still, MTSI remains optimistic about its prospects. MTSI has a certain amount of resilience build in due to the nature of its business, much of which is connected to defense spending, which tends to hold up quite well during a recession. From the Q3 earnings call:

“I would like to highlight, we are cognizant of the uncertainties around the broader global macroeconomic environment. And we do not presume to think our business would be immune from a global recession. Our longstanding posture has been to run the business in a way which enables us to remain both profitable and cash flow positive during all parts of the business cycle. As such, given the heightened economic uncertainty we have and will continue to manage the business, particularly the capital investments in spending budgets very carefully.

I’ll highlight however, that we have very little consumer market exposure and we believe our defense business is typically decoupled from near-term negative economic trends. Additionally, we believe our business is relatively small compared to the semiconductor industry at large and growth can be supported by market share gains as we expand and ramp our latest products and technologies. At a higher level, we believe the semiconductor industry growth over the long-term is supported by secular growth trends. More specifically, the drive towards more bandwidth, faster data speeds, higher frequencies and higher power levels whether in radar, electronic warfare, broadband access networks, 5G, or the data center, play the MACOM strength in RF, microwave and optical.”

A transcript of the Q3 FY2022 earnings call can be found here.

Management also reiterated that it is not seeing any weakness on the horizon. Demand remains strong:

“And so this is something we’ve been very focused on in trying to look for, let’s say, early trends of possible future softness. And at the end of the day, we’re not seeing that. We’re actually seeing continued strong bookings across all of the different end markets. So that’s the good news.”

Bottom line, there may be headwinds out there, especially as it relates to the semiconductor sector, but MTSI is doing fine at the moment.

Why some may be hesitant about MTSI

MTSI is doing fine, but there are still reasons why some may want to keep their distance. For instance, valuations may be a hurdle for some as they are higher than most. The stock is valued at 6.7 times book value, which is more than twice the average out there. MTSI has an enterprise value of $4.75B, equal to 17 times EBITDA on a forward basis and 22 times EBITDA on a trailing basis. In comparison, the sector median is 13x and 14x respectively, quite a bit less. MTSI has its strengths, but you will have to pay a premium to get in on those strengths.

	MTSI
Market cap	$4.53B
Enterprise value	$4.75B
Revenue (“ttm”)	$652.2M
EBITDA	$182.1M
Trailing P/E	18.67
Forward P/E	17.23
PEG ratio	0.04
P/S	6.08
P/B	6.71
EV/sales	6.23
Trailing EV/EBITDA	22.32
Forward EV/EBITDA	17.27

Click to enlarge

Source: SeekingAlpha

Investor takeaways

MTSI has a number of strengths. The company is very diversified with a wide range of products targeted at different markets. For example, MTSI is a supplier of such things as monolithic microwave ICs, radio frequency power amplifiers, high performance lasers – and that’s just for the telecom market, which itself includes optical fiber networks, wireless networks including 5G, broadband access networks and broadband satellite communications.

MTSI looks well placed to keep growing in the long run. For instance, MTSI is in the process of qualifying a GaN on SiC process, which could start to contribute as soon as early 2023. This process has the potential to become a growth driver for MTSI, possibly increasing annual revenue by several hundreds of millions of dollars all by itself. The recent passing of the U.S. Chips and Science Act should be a tailwind for MTSI with its heavy exposure to the U.S. market, including the defense sector.

MTSI is in the midst of a multi-year expansion. It’s not by accident that revenue has grown every quarter for three straight years. Demand is just that robust. The fact that a big part of it is tied to the defense sector means that MTSI has less to worry about if or when there is a recession, which tends to hurt those companies that depend on spending by the average consumer.

The charts suggest more and more are starting to realize that MTSI has attributes that could allow it to outperform if economic conditions change the way many expect them to. It’s likely no coincidence the stock changed directions in the second half of 2022. The stock was heading lower, but it now appears to be heading higher. It’s hard to fault someone if he or she decided to place bets based on all of this.

I am nevertheless neutral on MTSI. The case for long MTSI has its merits, but while valuations may be acceptable to some, they are unlikely to be acceptable to all. Some may argue that it is worth paying a premium for a company with attributes that could allow it to stay resilient, even if there is a major downturn in the economy. Others, on the other hand, may disagree.

Ultimately, the decision as to whether MTSI is worth backing comes down to whether multiples are acceptable where they are. MTSI gets checkmarks for pretty much everything else. If the asking price is not an issue, then long MTSI is worth considering. But if the asking price is too high, then it’s probably worth waiting for another time.