An Optical Illusion? MTSI Undervalued?
Summary
- Starting at the end of July, MTSI fell from highs of $65.99 to $39.67 in just over a month.
- Macom currently trades at $40.22 and is a long way away from recent highs.
- The average price target from price-target aggregator Marketbeat is $49.67 (+20%).
(By Oisin Breen, Research)
Macom Technology Solutions (NASDAQ:MTSI), a Massachusetts-based technology company that specializes in providing data centres and telecommunications optical components, essentially the stuff that makes high-speed Telecom work, is a $2.5bn market-cap company that may well offer significant value for the year ahead.
Macom's share price plunged at the end of July '17, leaving the company potentially available at a bargain price. Source: Bloomberg
The Lie of the Land
Starting at the end of July, MTSI fell from highs of $65.99 to $39.67 in just over a month. This meant that in one month's time, almost all of the gains Macom had made over 2017 were wiped out. The drop was significant, coming in at around 40%, and was prompted by weakened Chinese demand for optical components. Guidance for Q4 2017 also came in under expectations. Consensus revenue expectations of $205m were undermined by Macom's own projections of $165m (-20%), whilst EPS guidance of $0.45-0.5 was far lower than the market's expected $0.76. The company's next earnings call comes in two weeks, and with a lot of doom and gloom about China already priced in, earnings already downgraded, and the company trading below even Stifel's pessimistic price target of $43, it is not too implausible to suggest that there's value in these near year-long MTSI lows.
Macom's 5-year figures 
and projections, including revenue, adjusted margins, and adjusted EPS, suggest a company in good health, contrary to the company's relatively low share price. Source: Seeking Alpha/Macom
The Numbers
Macom currently trades at $40.22 and is a long way away from recent highs, suggesting if a rally does take place, there's plenty of upward growth potential already mapped out. Even after its poor performance in recent months, the Massachusetts-based company is still up 11.84% in the last 12 months, and both the PEG ratio (1.07) and the P/E Ratio (18.54) support the value thesis. Revenues and income are climbing steadily year over year, and sales figures have risen by 14.31% for Q2 as against the previous year's quarter, and 36.73% for Q3. Earnings growth for this year of 20.99% and forecast at 18% year-over-year for the next five are certainly positive, and the price targets analysts have posted in the past month are all price positive, with Jefferies Group the most bullish, offering a price target of $61 for Macom (+35%), whilst Stifel Nicolaus are the most cautious, offering a target of $43 (+7%). The average price target from price-target aggregator Marketbeat is $49.67 (+20%). Should investors decide that Macom has the capacity to pull itself out of its recent share price doldrums, these figures could well be beaten, with the company returning to its consistent trajectory over the past five years: upwards.
MTSI 5-year share price. Ever on the up, and set to return? Source: Bloomberg
The Value Position
Ultimately, what's knocked Macom in the latter part of this year is China, in particular, government delays and an inventory glut. This issue has been compounded by the resultant lower growth-altering investor perceptions, and the Massachusetts-based company's failure to meet market expectations for guidance. These are reasonable factors behind a justified short-term correction, however, they are short term.
China's halting of the deployment of its “passive optical network” will not last forever, given the country's desire to keep growing and slowly rebalance towards a more hi-tech offering than the cheap goods stereotype. Hi-tech needs high speed, and usually, that means fibre optics. Macom's Chinese revenues will rise again, and there are indications already that the Chinese fibre optics market is starting to show signs of resurgence. Furthermore, the broader fibre optics components market at large, according to research firm Technavio, is likely to continue to grow at 10% CAGR until 2021. As Technavio notes “the demand for fibre optic components will increase as they allow the efficient deployment and functioning of fibre optic cables.” Without these cables, there's no big data, no Internet of Things, and ultimately, no internet as we know it today. We need them, and they sell. Essentially, the fibre optics part of Macom's business, whilst it's taken a hit, is in a strong long-term position with regards to the market, which certainly suggests that there is value to be gained.
In addition to this, the 30% of Macom's business that is not based on fibre optics but centres instead around data centres, yet nevertheless feeds into fibre optics, given such centres' need for speed, is an area that is experiencing consistent growth. As Technavio observes: “the growth of big data and data analytics by enterprises that create enormous amounts of data daily is an important factor impacting the growth of the market segment.” Macom's data centre Q2 revenues of $57.8m, up 300%, tell their own story about the company's growing data business.
Global fibre optic market growth forecast suggests plenty of scope for value yet. Source: LightCounting
Conclusion
What we have in MTSI is a company that has seen its value rise steadily over five years, operating in a market with long-term growth prospects, and one that is set for a rebound once Chinese demand picks up, as it is almost certain to. Further to this, the underlying growth figures behind Macom are positive, and even the pessimistic price-target downgrades offered up by some analysts suggest at least some return on an investment. Revenues are up, gross profits are up, and the market may even grow more than the 10% suggested, as more speculative possibilities come into view, such as the Internet of Things ever greater bandwidth needs. In MTSI, it looks very much like we have a stock that's receiving its value from the bears, and one that offers plenty of longer-term value. A long position on MTSI, whilst not without risks, is one that could well offer significant returns.
This article was written by
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