MaxLinear Stock: With Cable Slowing, Other Business Need To Step Up (NASDAQ:MXL)

Writing about MaxLinear (NASDAQ:MXL) about a month ago, I said I saw mixed trends at this small RF and mixed-signal semiconductor company, including weaker cable gateway and Wi-Fi, but stronger fiber access, and those drivers certainly came through accordingly in the fourth quarter report, leading to meaningful sequential weakness in management’s guidance.

I’m still very skeptical on the company’s ability to generate real momentum (and 2023 should be a “put up or shut up” year) and I still don’t like the Silicon Motion (SIMO) deal. Even so, these shares are up about 10% since that article, and with business developing as I expected, I’m more confident that MaxLinear is bottoming out and offers enough to merit a closer look.

Signs Of Weakness Intensify In Q4

There was already evidence of slowing trends in prior quarters, but now there’s really no getting around the fact that some of MaxLinear’s major businesses have slowed significantly and are not likely to rebound particularly sharply.

Revenue rose 17% year over year and about 2% quarter over quarter, a slight beat versus expectations. Gross margin declined about two points year over year and closer to two and a half points sequentially (to 59.6%), missing by a full point on a less lucrative mix (weaker DOCSIS-related sales, I believe). Operating income rose 23% yoy but declined 2% qoq, with operating margin up 150bp yoy and down 140bp qoq to 32.5% (missing by 30bp).

The Broadband business reported a 23% year-over-year and 17% quarter-over-quarter decline in revenue on weaker cable gateway sales. With cable broadband additions declining, and likely to be weak throughout 2023, MaxLinear is seeing significantly lower demand for its gateway products, and MACOM (MTSI) likewise reported in its Telecom business (down 1% qoq), which does also include some cable broadband exposure. It will be worth monitoring Broadcom’s (AVGO) next earnings report to see how much weakness they’re experiencing, as they’re a primary competitor in DOCSIS gateways.

Connectivity was up 99% year over year and 27% quarter over quarter, and MaxLinear has enjoyed strong performance here with increased Wi-Fi 6 attach rates with integrated cable gateways, partly taking advantage of ON Semi’s (ON) exit from the business. Between

the commentary of MaxLinear and Qorvo (QRVO), though, it does sound as though the Wi-Fi 6 cycle is slowing in keeping with the weaker outlook for cable gateways overall.

Infrastructure was down 1% yoy and 11% qoq, and it sounds as though softer trends in wireless backhaul are responsible, and that would align with weaker results from Ericsson (ERIC) recently. Industrial and multi-market revenue rose 62% yoy and almost 1% qoq; management didn’t go into detail here.

MaxLinear Is Going To See A Significant Mix Shift

Given what I expect will be weakness in cable gateways until some point in 2024, MaxLinear is going to be facing some challenges in its core Broadband and Connectivity businesses. DOCSIS 4 and Wi-Fi-7 will be meaningful drivers down the road, and there are still opportunities for improvements in content/attach rate, but I wouldn’t expect a big reacceleration until those standards drive revenue.

Within Broadband, though, MaxLinear does have opportunities in PON tied to fiber access. MaxLinear secured a significant Tier One win for fiber access, and not only is fiber to the home growing, MaxLinear’s content here appears to be around double what it is with WiFi 6-enabled cable gateways. This business will be starting off from a much, much smaller base, but the margins should be attractive given the higher ASPs/bill of materials.

Looking at Infrastructure, this is a business segment that really interests me for 2023. While overall 5G spending is going to be pretty lousy for the likes of Nokia (NOK) and Ericsson in 2023, MaxLinear should have some leverage to 5G mmWave products tied to deployments in India.

I’m more curious about what MaxLinear can do in data center interconnect with its PAM-4 products. Management has talked this up for a while, but there have been frequent excuses as to why it hasn’t ramped yet. Given the strength companies like MACOM, Marvell (MRVL), and Broadcom are seeing in data center, and the strength I expect to see in 800G deployments in 2023, if MaxLinear has any real traction in this area (I think they don’t), it needs to become clear in 2023.

The Outlook

The offer for Silicon Motion remains controversial, but management remains undeterred and expects to close the deal around the middle of 2023 (Q2 or Q3). I’d still prefer to see management walk away, as I don’t think the strategic synergies are very strong and executing on financials-driven deals is not as easy as it seems. I will say this, though – with the ongoing weakness in consumer electronics, if the deal does go through, MaxLinear should have the advantage of acquiring the business near the cyclical lows for its primary markets.

I’m bullish on MaxLinear’s opportunities in fiber access, but it is clear that weaker DOCSIS 3 and Wi-Fi 6 will be a real headwind in the near term. Likewise, I’m guardedly bullish on wireless infrastructure opportunities in 2023, but very skeptical about the likelihood of the company gaining real traction in PAM-4 interconnect.

I expect year-over-year revenue declines across 2023, but after two weak sequential quarters to start the year, I expect a return to sequential growth in Q3’23. Longer term, I expect around 5% annualized revenue growth, with two, maybe three, years of double-digit growth following the downturn in 2023.

I believe that MaxLinear could see around 350-450 points of operating margin erosion in 2023, but I do expect them to recover much of that in FY’24 and then expand margins in FY’25. If their PAM-4 business really pans out, there could definitely be upside there. I expect weaker free cash flow in FY’23, but I still see adjusted FCF margins moving toward the low-20%’s over time and I can see a path toward mid-20%’s (again, tied to subscale products like PAM-4 interconnect). Once MaxLinear is past 2023, I expect low double-digit annualized FCF growth.

On the basis of discounted free cash flow and margin-driven EV/revenue and EV/EBITDA, I believe MaxLinear is undervalued below the mid-$40’s to low-$50’s. A forward multiple at the low end of the range gets me to around $46.50 (on 29% op margin and $980M in rev), but semiconductor stocks usually start moving about six months ahead of the turn in the business, and using a more “mid-range” multiple gets me to a $51.50 fair value.

The Bottom Line

MaxLinear is going to post some ugly quarters, and I do see risk that the cyclical correction is sharper and/or longer than currently expected. I’m also not bullish on the PAM-4 business nor the proposed Silicon Motion deal, and it’s difficult to recommend a stock where you disagree with management on a major strategic move. Even so, the core business looks poised to drive a better valuation and I think this name is worth considering for further due diligence.