MACOM Technology Solutions Holdings (MTSI): Pros And Cons

MACOM Technology Solutions Holdings (NASDAQ:MTSI) has reason to feel good with the year 2022 coming to a close. MTSI has held up better than most, aided by several factors. The stock has shown resilience in a difficult year, especially in the second half of the year. The charts suggest the trend is for the stock to go higher. However, while long MTSI has several arguments in its favor, some may still want to keep their distance from MTSI for a couple of reasons. Why will be covered next.

The stock has pulled back in recent weeks, but the trend remains intact

It’s fair to say that 2022 has been a difficult year for semiconductor stocks. For instance, the iShares PHLX Semiconductor ETF (SOXX) has lost 28% YTD with one month left in 2022. In comparison, MTSI, a supplier of analog, mixed-signal and optical semiconductors, is better off with a loss of 12% YTD, thanks in part to improved performance in the second half of 2022. The chart below shows how the stock has changed directions in 2022.

The second half of 2022 has been much better for MTSI than the first half. The stock fell in the first half of 2022 and was down 44% by early July, but a 49% gain in the second half has significantly narrowed YTD losses. Furthermore, the charts suggest the stock is in an uptrend with higher lows and higher highs.

If the lows and highs are connected, then two ascending trendlines appear, both running parallel to one another. MTSI is hemmed in between these two trendlines with the stock respecting the boundaries imposed by these trendlines. The upper trendline can thus be seen as resistance and the lower trendline can be seen as support.

Both of them are going up, which means the stock is going higher as well as long as the trendlines remain in place. The charts have painted what looks like an ascending channel, a bullish pattern. It’s not every day the trend is easy to spot, but in the case of MTSI, the trend is fairly clear and it is pointing up, something that is very likely to please the bulls.

Earnings growth has supported the rally in the stock

The rally in the stock was made possible by earnings growth that has stayed resilient. In fact, the latest earnings report was followed by a 25% gain in the stock’s value in about 2 weeks’ time. A growing number of semiconductor stocks have been hit by disappointing quarterly earnings, especially in recent months, but MTSI has thus far managed to not just meet, but surpass expectations with double-digit growth. This was true once more in the most recent report.

Q4 revenue increased by 3.4% QoQ and 14.8% YoY to $178.1M, the fourteenth consecutive sequential increase in quarterly revenue. Industrial & Defense contributed $78.5M, Telecom contributed $62M and Datacenter contributed the remaining $37.6M. Margins improved once again, which boosted the bottom line together with growth in the top line. GAAP EPS increased by 1300% YoY to $3.36 and non-GAAP EPS increased by 26.2% YoY to $0.77.

Note that unlike the non-GAAP numbers, the GAAP earnings benefited from a $200M tax benefit in Q4, which affected the quarterly comparisons. As a result of the gains in the income statement, the balance sheet got better as well. Cash, cash equivalents and short-term investments reached $586.5M in Q4, up $50.2M QoQ and $242M YoY. The table below shows the numbers for Q4 FY2022.

(GAAP)	Q4 FY2022	Q3 FY2022	Q4 FY2021	QoQ	YoY
Revenue	$178.143M	$172.259M	$155.211M	3.42%	14.77%
Gross margin	60.9%	60.7%	58.1%	20bps	280bps
Income from operations	$37.031M	$36.003M	$26.282M	2.86%	40.90%
Net income	$239.336M	$32.234M	$17.129M	642.50%	1297.26%
EPS	$3.36	$0.45	$0.24	646.67%	1300.00%
(Non-GAAP)
Revenue	$178.143M	$172.259M	$155.211M	3.42%	14.77%
Gross margin	62.6%	62.2%	61.1%	40bps	150bps
Income from operations	$56.926M	$54.111M	$46.839M	5.20%	21.54%
Net income	$55.140M	$52.080M	$43.270M	5.88%	27.43%
EPS	$0.77	$0.73	$0.61	5.48%	26.23%

Click to enlarge

Source: MTSI Form 8-K

If the Q4 numbers are out, then so too are the numbers for the whole year. FY2022 revenue increased by 11.3% YoY $675.2M. GAAP EPS increased by 1044.4% YoY to $6.18 thanks in part to the aforementioned tax benefit and non-GAAP EPS increased by 31.1% YoY to $2.82. Note that FY2022 margins surpassed 60% for the first time. The table below shows the numbers for FY2022.

(GAAP)	FY2022	FY2021	YoY
Revenue	$675.170M	$606.920M	11.25%
Gross margin	60.2%	56.3%	390bps
Income from operations	$132.674M	$81.002M	63.79%
Net income	$439.955M	$37.973M	1058.60%
EPS	$6.18	$0.54	1044.44%
(Non-GAAP)
Revenue	$675.170M	$606.920M	11.25%
Gross margin	62.0%	59.6%	240bps
Income from operations	$210.978M	$170.302M	23.88%
Net income	$201.006M	$151.863M	32.36%
EPS	$2.82	$2.15	31.16%

Click to enlarge

Source: MTSI Form 10-K

Guidance calls for Q1 FY2023 revenue of $177-182M, an increase of 12.5% YoY at the midpoint. The forecast expects non-GAAP EPS of $0.78-0.82, an increase of 25% YoY at the midpoint. MTSI is also entering the new year with the backlog at record levels.

(Non-GAAP)	Q1 FY2023 (guidance)	Q1 FY2022	YoY (midpoint)
Revenue	$177-182M	$159.6M	12.47%
Gross margin	61.5-63.5%	61.4%	110bps
EPS	$0.78-0.82	$0.64	25.00%

Click to enlarge

MTSI is starting to see softness

However, while the numbers don’t show it yet, MTSI is seeing some softening in market demand. Book-to-bill could be below 1 for the first time in quite some time. From the Q4 earnings call:

“However, to be clear, we do not believe our business will be immune from a global recession or market slowdown. In fact, recently, we have seen softness in order flow. And as a result, we are being cautious and believe our book-to-bill ratio could be at or below 1 this quarter.

Despite this, we are optimistic about our prospects for fiscal year 2023 and beyond.”

A transcript of the Q4 FY2022 earnings call can be found here.

The backlog provides a buffer for MTSI, but if book-to-bill stays below 1, the top line will eventually start to contract and the bottom line will follow not long after.

“At the beginning of fiscal ’22, we also set the threshold at 10%, and we delivered 11%, so we were happy about that. And as we think about fiscal ’23, we’re really taking the same philosophy forward that we want to have at least 10% growth. However, you have to understand that given the macroeconomic conditions, the geopolitical risks, certainly, some of the softness we’re seeing in Asia, specifically China, all of those items do provide, I would say, more uncertainty in terms of our targets in terms of fiscal ’23.”

Management, however, remains optimistic about the company’s prospects for FY2023. MTSI is aiming for another double-digit increase in revenue. On the other hand, MTSI acknowledges the existence of headwinds, which could make it difficult to achieve its goals.

MTSI comes at a premium

MTSI has a number of things going for it, but valuations are not among them. On the contrary, multiples for MTSI are higher than most semis. For instance, MTSI has an enterprise value of $4.7B, equal to 19 times EBITDA on a forward basis and 24.9 times EBITDA on a trailing basis. In contrast, the median for the sector is 12.6x and 13.3x, respectively. The table below shows some of the multiples MTSI trades at.

	MTSI
Market cap	$4.68B
Enterprise value	$4.73B
Revenue (“ttm”)	$675.2M
EBITDA	$189.9M
Trailing GAAP P/E	10.62
Forward GAAP P/E	34.59
PEG ratio	0.01
P/S	6.79
P/B	5.45
EV/sales	7.00
Trailing EV/EBITDA	24.89
Forward EV/EBITDA	19.00

Click to enlarge

Source: Seeking Alpha

Note that MTSI currently has a P/E ratio of 10.6, which is much lower than the median at 24.2, but this is due to the $200M tax benefit mentioned earlier. This raised GAAP earnings to $440M or $6.18 per share in the last 12 months, drastically lowering the P/E multiple. On a forward basis, which is not affected by the tax benefit, MTSI trades at 34.6 times earnings, above the median at 24.3x.

Investor takeaways

There are a number of reasons why long MTSI looks appealing. MTSI has a very wide customer base and a very diverse portfolio of products, with new ones being added all the time. In the recently concluded FY2022, MTSI released about 150 new products. No single product accounted for more than 2% of total revenue.

The consumer segment has been responsible for most of the demand weakness semis are seeing, but MTSI has little exposure to this segment of the market. Instead, MTSI is exposed to the defense sector, which is seen as more resilient in terms of demand as defense spending, unlike consumer spending, tends not to go down during an economic downturn, which many are expecting in the near future. These attributes are likely some of the reasons why MTSI has yet to see its quarterly earnings deteriorate the way other semis have.

Investors seem to have flocked to MTSI for its perceived safety during tough times. As a result, the stock has rallied since the middle of 2022. More importantly, the trend suggests the stock is likely heading higher. There is a clear channel to be found in the charts and as long as the channel remains, there is a pretty good reason to stick with long MTSI.

I am nevertheless neutral on MTSI as stated in a previous article. Earnings growth has not been affected, unlike other semis, but MTSI has begun to experience a softening in demand with new bookings slacking off. It could be just a temporary blip and the backlog does ensure that any weakness will take time to show up, but it could also be a harbinger of things to come. MTSI may be more resilient than other semis, but it would be a mistake to assume MTSI is invulnerable to a deterioration in quarterly earnings.

While MTSI has a number of appealing attributes, the asking price to get in on those attributes is on the high side. MTSI trades at a premium to most semis, even to some growing at a similar pace as MTSI. While one could argue paying a big premium is justified for a stock that could prove to be more resilient to an economic downturn that may arrive in 2023, not everyone is likely to agree.

Bottom line, there is certainly a case to be made for long MTSI. The trend is clear and it is pointing up. On the other hand, there is a price to be paid for MTSI. If one is looking for relative safety during uncertain times and one is willing to pay extra for what MTSI has to offer, then MTSI fits the bill. If not and multiples are a hurdle too high to overcome, then it may be better to wait if or when the stock goes on sale.