MACOM Technology Solutions: Strength Is Set To Slow Down
- MACOM Technology Solutions Holdings, Inc. saw a surprisingly strong 2022.
- Strong sales growth is set to slow down significantly in the coming quarter.
- The resulting outperformance of MACOM Technology Solutions shares makes me cautious, as I do not see a compelling risk-reward here.
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Shares of MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) have held up relatively well compared to its peers in the semiconductor sector, as revenue growth strengthened during 2022, in sharp contrast to the rest of the industry. This is to be applauded, although a premium valuation and anticipated revenue growth slowdown makes me cautious here.
MACOM describes itself as a leading supplier of semiconductor products. The company designs and manufacturers such products for Telecommunication, Industrial, Defense and Datacenter marks, serving 6,000 customers with its broad portfolio. These include RF, microwave, analog, mixed signal and optical semiconductor technologies.
For the year ending October 2021, the company grew sales by more than 14% to $607 million, on which the company posted solid operating profits of $81 million. Net earnings only came in at $38 million amidst quite some interest expenses, warrant liabilities and taxes, as GAAP earnings came in at $0.54 per share with 70 million shares outstanding.
The gap with adjusted earnings was huge, as adjusted earnings were posted at $2.15 per share, or $152 million in dollar terms. A great portion of the adjustment comes from amortization charges, which I am happy to adjust for, yet a pre-tax $43 million stock-based compensation expense was equal to $0.60 per share on a pre-tax basis, resulting in realistic earnings around $1.50 per share by my mark.
Since its IPO, after which shares traded around the $20 mark in 2012, shares had seen a boom to $60 in 2017, after which shares fell to their teens in 2019 as sales retreated and significant losses were reported. Shares peaked again in the mid-seventies in 2021 amidst the rise of the markets at large, but ever since shares have traded between $45 and $75, now trading at $70 per share.
Needless to say, valuations were demanding, as a $5 billion valuation around the peak in 2021 translated into a high 8-9 times sales multiple and very high earnings multiple with realistic earnings trending around $1.50 per share.
Some Operational Momentum
After reporting its results in October, MACOM announced a small divestment, shedding its equity interest in Ampere for nearly $128 million in the final days of 2021. The company has seen solid momentum in 2022, with first quarter sales up more than 7% to nearly $160 million as margins improved meaningfully as well.
Despite dollar strength and cooling down off some end markets, MACOM saw second quarter sales increase by as much as 10%, with third quarter sales up as much as 13%. In November, the company ended the year with a nearly 15% increase in fourth quarter revenues. This meant that full-year sales rose 11% to $675 million as full-year adjusted earnings rose from $2.15 per share to $2.82 per share. With a $45 million pre-tax equity compensation expense, being equal to $0.63 per share on a pre-tax basis, realistic earnings trend around $2.30 per share.
Stronger earnings meant that the company has turned into a flattish net cash position, aided by the Ampere divestment as well, helping to reduce net interest expenses a great deal, adding largely to the earnings boom. Strengthening momentum meant that shares held up very well, now trading at $70 per share. This makes for a 30-times earnings multiple, yet for an unleveraged business, although the strengthening momentum in both margins and sales is noteworthy in an uncertain economic environment.
Momentum continued in the first quarter of the fiscal year 2023, with sales up nearly 13% to $180 million, for a run rate of around $720 million. Adjusted earnings of $0.81 per share trend in excess of $3 per share here, reducing the forward looking multiple for 2023. The company indicated that the second quarter is expected to soften a bit with sales seen at a midpoint of $168 million, although adjusted earnings of $0.78 per share look reasonable. The revenue guidance implies that sales growth is set to slow down to just 2%, marking a rapid slowdown on an annual basis.
The 71 million shares now trade at $70, for a $5 billion equity valuation which here works down to a similar enterprise valuation as well. Given the run rate in sales, the sales multiple drops to 7 times, as forward earnings multiples will likely fall a bit as well.
Alongside the earnings report, the company has announced a bolt-on deal as well. The company has reached a deal to acquire OMMIC SAS, a French-based semiconductor business. The EUR 38 million purchase prices comes in at less than 1% of the own valuation, indicating that this is truly is a bolt-on deal, with no revenue contribution being quantified.
The truth is that MACOM Technology Solutions Holdings, Inc. has been doing alright, but actually saw very soft operational performance in the late 2010s. The solid performance by MACOM Technology Solutions Holdings, Inc. has been awarded a full valuation here, as I am not happy to pay this kind of multiple with growth set to come to a near-standstill in the coming quarter, certainly not as many technology and semiconductor names have cooled off meaningfully and trade at very reasonable multiples.
So, while the MACOM Technology Solutions Holdings, Inc. business performance is to be applauded, I do not think that the valuation is compelling enough to get involved here.
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