MaxLinear IncMXL41,09 $
Today we have a speculative idea: take shares in electronics manufacturer MaxLinear (NASDAQ: MXL) in anticipation of a positive transformation of this business.
Growth potential and validity: 21% behind 19 Months; 81,5% behind 6 years.
Why stocks can go up: because the company is on the path of adventure and has great potential.
How do we act: take now 42,06 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
MXL is engaged in the development and design of semiconductor products without own production. For those interested, MXL has a presentation about things, which are produced under its brand.
According to the company's annual report, according to the areas of application, its revenue is divided as follows:
- Broadband connection - 55%.
- Connection - 17%. Everything, what is connected with wifi and wireless connection.
- Infrastructure - 13%.
- Industry and more 15%.
Revenue by country and region:
- Asia - 83%. Here 40% occupies Hong Kong, 12% - China, 13% - Vietnam.
- USA - 4%.
- Other, unnamed countries and regions - 13%.
Arguments in favor of the company
Fell down. During these six months, the shares fell almost twice - from 75 to 42.06 $, - which is explained by abnormal expectations of investors: from the start of the pandemic to the time, previous fall, shares rose by 250%, and then the company a couple of times did not meet the inflated expectations of investors.
It seems to me, much more important, that the company has reached operating profit and, let's hope, she stays at that level. AND, given the circumstances below, it makes sense to hope for a rebound.
Promising. You can say about any company like MXL, that she is promising, and don't make a mistake. Modern society and economy are becoming increasingly dependent on high-tech infrastructure, which naturally generates a growing demand for solutions from such companies, like MXL. So in this regard, I am calm for its long-term prospects..
Addition to the family. There is a possibility, that MXL will soon be able to double in size: it plans to buy the US-Taiwanese company Silicon Motion (SIMO) for $3.8 billion.
Here are the terms of the deal:
- SIMO will be bought partially for money - 93,54 $ per share, - partially for shares of MXL itself - 0.388 MXL shares for each SIMO share;
- the cost of purchasing SIMO as a whole will be 114,34 $ per share. The premium to the price of SIMO before the first news about the deal is 48%;
- SIMO does pretty much the same thing., as MXL, - designs semiconductors, without direct production;
- SIMO buy with P / S 4,33 and with P / E 18,96.
Certainly, the deal is truly titanic: MXL wants to buy a company even bigger than itself, which creates a number of problems. But I still see the good in it..
SIMO is not a loss-making startup, and a profitable enterprise with a final margin is greater 20% from revenue and good growth performance. “Double” MXL will have a pre-tax margin of 35% of revenue.
Both companies have very strong competencies, which complement each other well and will allow together to cut tribute from the growing segment of data centers and digitalization of enterprises. Well, finally, the combined company will be the seventh in its category, which will allow her to dictate more favorable terms for her clients, - and now, individually, none of these companies is even in the top ten.
So that, in my opinion, MXL can be invested with a view to expanding the company.
Can buy. Now MXL has a capitalization of just over 3 billion. After closing the transaction with SIMO, it will become twice as large. But in absolute numbers, it's not that much.. It seems to me, MXL what now, what then can some semiconductor giant buy.
What can get in the way
Concentration in everything. Two unnamed large clients of the company give it a significant share of revenue: 14 And 17%. The top three unnamed suppliers also account for the bulk of its component purchases.: 38, 22 And 12%.
Change in the nature of the company's relationship as with major suppliers, and with important clients, MXL reporting can hurt.
China in everything. The company does most of its sales in China., which seems to be a problem due to two points.
Firstly, business activity in China and around the country is now paralyzed due to the new coronavirus quarantine.
And secondly, a pronounced U.S. desire to crush China's tech sector could lead to disruptions in China's MXL operations.
Silicon Motion. The deal to buy SIMO has not yet been completed and, due to its size, could bring problems. The company will finance a significant part of the purchase of SIMO with borrowed money., which will increase her debt burden.
A large portion of the deal's value will be financed by issuing new MXL shares., which will dilute the share of existing shareholders of the company. So stocks could still fall very seriously..
Deal not closed, and another buyer can offer a higher price for SIMO, e.g. Taiwanese MediaTek. In this case, MXL will have to either try to jump over his head, offering more money, or refuse it, thereby burying their dreams of expansion. All in all, wherever you throw - everywhere a wedge.
If the deal with SIMO fails to close, it's a big risk, that in a year the company will become unprofitable again, since previous years it was actively spent on R&D.
The merger with SIMO will strengthen its position in the market and, I hope, eliminates the need to work at a loss for years. What if the merger fails?, then the MXL will be heavier afterwards - although, maybe, Investors will react to the news of the collapse of the deal with optimism. Thus, MXL will avoid large expenses and dilution of the share of existing shareholders.
Not cheap. У MXL P / S — 3,7 and P / E — 49, so you can't really call her underrated.. After the merger with SIMO, these multipliers, certainly, become smaller, but, until this merger happened, should be considered, she's not cheap.
What's the bottom line?
I believe, that if the transaction with SIMO is closed, the MXL business has great potential for further development - and it is worth the risks, that such a large purchase brings with it for the company.
Therefore, shares can be taken now for 42,06 $, and then we have the following options:
- wait, when will the stock be worth again 50 $. Think, we will reach this level in the next 19 Months;
- hold stocks until they return to the level 75 $. Here it is better to rely on 6 years: during this time, the transformation of MXL will become quite complete.
In the same time, considering all points, should get ready, that the stock will shake.