MaxLinear Looks Cheap, Given Valuation and Growth
After a slight pause in December, the technology sector has been sizzling hot to start off the new year, with the NASDAQ up 4.25% and breaking 7,200 on Thursday.
In my quest for small-cap technology stocks that offer strong risk-to-reward opportunities, a company that suits my criteria is MaxLinear, Inc. (NYSE: MXL) with a market cap of about $1.8 billion.
MaxLinear is a fabless semiconductor company focusing on the development of next-generation broadband and networking semiconductor system-on-a-chip (SoC) solutions for the broadband communication segment.
My bull thesis for MXL stock is based on the growth metrics and the relatively cheap valuation assigned by the market.
MaxLinear has slightly underperformed the S&P 500 over the last year but appears set for higher gains after displaying a bullish golden cross in November 2017 when the 50-day moving average broke above the 200-day moving average.
MXL stock is currently in a short-term uptrend supported by strong relative strength and a bullish moving average convergence/divergence (MACD) indicator.
Chart courtesy of StockCharts.com
I see major support at around $22.00 with an initial move towards $28.00 to $30.00 and above.
My Bull Case for MXL Stock
The first thing that really drew my attention was that MaxLinear has grown its revenues in 11 straight years, which is an impressive sign of consistency.
The positive revenue trend is expected to continue with growth of 8.5% to $420.76 million in 2017 followed by a much better 21.2% to $509.9 million in 2018. (Source: “MaxLinear, Inc. (MXL),” Yahoo! Finance, last accessed January 11, 2018.)
In addition, MaxLinear has managed to control its cost side with gross margins expansion in 2016. The improvement in gross margins will help earnings growth.
Earnings revisions have been rising over the past 90 days, which is a bullish sign for a higher share price for MXL stock at the current multiple or a higher multiple.
Insiders have been buying MXL stock to the tune of 120,226 shares over 19 transactions during the past six months. There were no sales. (Source: Ibid.)
The forward multiple of 14.85-times for MXL stock is cheap and compares favorably to the 99-times trailing earnings.
The PEG ratio is 0.94 suggest MaxLinear trades at below its projected five-year CAGR for earnings. For example, even if the multiple or PEG rises by 50%, it would not be outrageous and would imply a price of around $40.00 for MXL stock.