MACOM Technology Ideal for Contrarian Investors
If you’re looking for an aggressive battered-down small-cap technology stock with an intriguing risk-to-reward trade profile, MACOM Technology Solutions Holdings Inc (NASDAQ:MTSI) may be just what you are searching for.
But I warn you, the MTSI stock chart is downright ugly.
MACOM stock was trading way up at $65.99 in July 2017, but this was followed by a steep downward slope on the chart. The stock is down a staggering 48% in the last three months and 64% in the past year.
Chart courtesy of StockCharts.com
“Brutal” would be a word too kind to describe the price action of MTSI stock, but there is some hope (or prayers) on my part. MACOM traded down to $15.50 at the start of April 4, which was met with some technically oversold buying support and a potential chance for an aggressive trade for thrill seekers.
As someone who scours the screens for contrarian opportunities, often I find that the ideal time to pick up shares is when no one else wants them. That’s the situation with MACOM stock. The MTSI stock chart is bearish, but is also enticing.
MACOM manufactures chips employed in optical, wireless, and satellite networks. The company’s objective is to broaden the coverage area while ramping up the speed of mobile, Internet, and fiber optic networks.
While the tailwinds in the company’s business is sound, MACOM must improve its execution and deliver much better results.
MTSI Stock Is a High-Potential Work in Progress
MACOM’s revenues have risen in three consecutive fiscal years from $420.6 million in fiscal 2015 to $698.8 million in fiscal 2017.
But the results are expected to be dismal for MACOM in fiscal 2018 as the company sorts things out. Revenues are expected to slide 16.9% to $580.3 million prior to rallying 16.1% to $673.9 million in fiscal 2019. (Source: “MACOM Technology Solutions Holdings, Inc.,” last accessed April 4, 2018)
The revenue estimates for MACOM stock are much lower than the previous estimates that called for growth of over 20% in each year, which is why MTSI stock has collapsed.
MACOM will need to watch its gross margins, which expanded from 42% in fiscal 2014 to 52% in fiscal 2016 prior to contracting to 47% in fiscal 2017.
And while revenues increased in three straight years, MACOM has seen its earnings decline, which will need to be addressed.
Earnings are predicted to fall to $0.50 per diluted share in fiscal 2018 versus $2.32 per diluted share in fiscal 2017, but then improve to $1.17 per diluted share in fiscal 2019.
How the story turns out for MACOM stock will be based on its ability to rectify the problems plaguing the company and deliver strong results.
MACOM is obviously a work in progress and is advised for risk capital. MTSI stock appears to be finding some support after the oversold sell-off.
If MTSI can deliver its consensus earnings per share (EPS) for fiscal 2019, the forward valuation of 15.15-times would indicate an attractive price for those willing to assume the risk.