In March, I wrote in reference to MaxLinear (MXL) that "the road from here to there isn't going to be straight or smooth", but I didn't expect a crevasse to open up and swallow the stock. MaxLinear's first quarter miss and guidance reduction were arguably not as bad as the stock performance would suggest, but the timeline for revenue acceleration seems to keep sliding, and management credibility is potentially becoming an issue. The shares do seem undervalued now, but with worries about a wider slowdown in semiconductors, ongoing issues in optical, and delays in the revenue ramp, this is going to be a challenging hold for the near term.
Sequential Results Remain Sluggish
MaxLinear reported 25% yoy growth in revenue but came in a little short of expectations and posted a greater than 2% contraction in sequential revenue. Management did a good job of managing expenses, with non-GAAP gross margin up about two points yoy and almost three points qoq, while non-GAAP operating income rose 27% yoy and 1% qoq.
Connected Home saw a 15% yoy decline in revenue and flattish sequential performance, with severe weakness in satellite revenue as subscribers continue to abandon satellite TV. Infrastructure was down slightly on a sequential basis despite strong wireless infrastructure growth (up 40% qoq) as the optical market in China remains especially weak. Industrial and multi-market revenue declined 5% qoq.
Lower Guidance As The Wait For The Ramp Goes On…
MaxLinear's slight miss was arguably a bit curious, given that the company reiterated guidance in early April, but the guidance for the second quarter was the bigger issue. At the midpoint, management's guidance for the next quarter was more than 10% below the prior sell-side average.
Ongoing weakness in satellite receivers and switches and terrestrial tuners will continue to play a role, but so will lower expectations for MOCA, and ongoing weakness in Chinese optical (exacerbated by the ZTE ban). Chinese optical is a sector-wide issue, but MoCA is disappointing, given the role it's supposed to play in helping re-accelerate MaxLinear's revenue growth. MoCA is a standard for using coaxial cable for high-speed data in the home, and MaxLinear sells chipsets for devices like set-top boxes, cable modems, and so on.
MaxLinear is establishing a regrettable pattern of lowering guidance, though the CEO wasn't entirely wrong when he mentioned on the call that these revisions were relative to analyst expectations and not company-issued guidance (as the company only projects one quarter ahead). Even so, the bull story on MaxLinear has been an acceleration in optical interconnect revenue coming from the company's leadership in PAM4, including its recently-introduced 400Gbps chipset that includes its PAM4 DSP and PAM4 TIA. Management has pointed to an addressable optical market of $1.5 billion of $2 billion, with over $100M in DC optical revenue in three years and over $50 million in fiber node revenue - meaningful for a company with less than $450 million in annual revenue. Likewise with opportunities like MoCA and wireless infrastructure (though that is growing nicely right now).
Perhaps some of the issue with MaxLinear is that Broadcom (AVGO) continues to do well - one analyst once referred to MaxLinear as the "front-end silicon partner for the anti-Broadcom establishment". Whatever the case may be, the pattern of results and guidance have eroded faith in the growth re-acceleration story and shifted this more toward a "show me" story at a time when investors are increasingly concerned that the semiconductor sector is due for a slowdown/correction in revenue.
Accounting for a slower ramp/acceleration leaves my long-term revenue growth target above 8% but shifts more revenue and higher margins back into the future. Consequently, while my long-term revenue and FCF growth estimates really haven't changed, the later ramp pushes my DCF-based fair value down to around $20. The combination of lower near-term revenue growth and slower/later margin leverage pushes my EV/revenue multiple down to 4.5x, and combined with a lower revenue estimate, my revenue-based fair value goes down to the mid-$20s.
The Bottom Line
If you still believe that MaxLinear's revenue ramp is a "when, not if" phenomena, this steep post-earnings correction is certainly an opportunity to consider. I'm still generally bullish on the quality of the company's products and the size of the revenue opportunity, but it is clear that it is developing more slowly than management initially expected, and the questions from sell-siders are getting more pointed about management's understanding of, and visibility into, those growth markets. These shares are likely to be in the doghouse for a little while now, as I believe it will take a meaningful meet/beat-and-raise quarter to change the tone.
Disclosure: I am/we are long AVGO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.