MaxLinear: Staging a Turnaround for the AI Broadband Chip Maker

Key Points

• MaxLinear makes chips used for high-speed data transfer and broadband applications.
• MaxLinear reported a kitchen sink quarter, missing consensus estimates by 4 cents with a 40% YoY drop in revenue but sees signs of improvement.
• MaxLinear sees tailwinds from AI data centers and the broadband industry transition to 800 GB and beyond as the company achieves a one million unit annual product run rate.

MaxLinear Inc. NASDAQ: MXL designs and manufactures chips used in high-speed communication and data transfer systems and devices enabling multi-gig connectivity. The computer and technology sector company is a leader in providing analog, digital, mixed-signal, and radio frequency (RF) integrated circuits for use in wireless and wired broadband access, connectivity, and infrastructure applications. MaxLinear recently unveiled its MaxAI artificial intelligence (AI) technology framework, which will be integrated into its AnyWAN and Wi-Fi 7 solutions.

Some of their well-known clients include Dell Technologies Inc. NYSE: DELL, Vodafone Group Public Ltd. Co. NASDAQ: VOD, and formerly Comcast Inc. NASDAQ: CMCSA, with which they are in a legal battle.  

Recovering From Silicon Motion Merger Termination Fallout

MaxLinear originally announced the acquisition of NAND flash controller maker Silicon Motion Technology Co. NASDAQ: SIMO on May 5, 2022, in a $3.8 billion deal. However, MaxLinear terminated the planned acquisition on July 26, 2023, citing SIMO's failure to meet closing conditions amidst industry headwinds. SIMO claims MaxLinear sabotaged the deal and seeks a termination fee of $160 million, which MaxLinear is contesting.

A group of investment funds also sued MaxLinear for misrepresenting its commitment to the merger, in which MaxLinear received necessary government approval but opted to terminate the deal afterward anyway. On Aug. 29, 2024, a US District Court for the Southern District of California dismissed the proposed class action, causing shares to jump 25%. However, the SIMO arbitration is still pending to receive its termination fee and damages, interest, and costs.

Seeing the Signs of Industry Recovery

While the headline numbers look bleak, there are encouraging signs of a turnaround.

MaxLinear reported its third quarter of 2024 EPS loss of 36 cents, missing the consensus estimate by 4 cents. Revenues fell 40.2% YoY to $81.1 million, still beating consensus estimates of $80.4 million.

For its fourth quarter of 2024, the company expects revenues of $80 million to $100 million versus $80.8 million consensus estimates. Non-GAAP gross margin is expected to be between 57.5% and 60.5%, and non-GAAP operating expense is expected to be between $58 million and $64 million.

Hitting the One Million Unit Run-Rate

MaxLinear CEO Kishore Seendripu commented that customer orders are improving as they are on track to exit the year at a run rate of one million units of its high-speed optical interconnect products driven by its customers' transition to 800 GB and beyond. Industry-wide 800 GB PAM4 Ethernet adoption is ramping up even as the demand for 400 GB continues to increase. Seendripu pointed out that renewed growth and earnings improvement for Q4 and beyond are being driven by the success in Ethernet, fiber PON gateways, storage, and Wi-Fi7.

Demonstrating Panther III Storage Accelerator Growth Driver

Its Panther III is a hardware-accelerated storage compression and encryption product targeting compute servers and enterprise storage applications. The storage accelerator was showcased at the Flash Memory Summit in July with partner Applied Micro Devices Inc. NASDAQ: AMD. Panther III can achieve up to 40X more throughput with up to 190X better latency and up to 1000X less CPU utilization.

Seendripu stated, “The need for AI at the edge, as well as growing security considerations, are resulting in a shift towards enterprise storage with all-flash array and hybrid storage enterprise application systems. Panther is also gaining traction in compute subsystems for usage across servers and datacenter storage customers. Our Panther product is strongly positioned for this macro 10, and we have multiple design wins, enterprise OEM customers, and wire across major geographies.”

MXL Stock Completes a Cup Pattern

A cup pattern starts with a short-term swing high cup lip line as the stock falls to a swing low and stages a rally back up to the cup lip line resistance level, forming a U-shaped trajectory.

MXL stock formed its cup lip line resistance on the gap down to $16.66 on its prior Q2 2024 earnings report. Shares fell to a swing low of around $11.22 before staging a rally towards the lip line into its Q3 earnings report. MXL gapped on the results up to $17.10 to complete the cup pattern before sinking back down to the $14.85 level. The daily RSI is chopping flat around the 57-band. Fibonacci (Fib) pullback support levels are at $5.77, $5.35, $4.75, and $4.39.

MaxLinear’s average consensus price target is $23.86, indicating a 60% upside, and its highest analyst price target is $30.00. Four analysts have Buy ratings, and three have Hold ratings. The stock has a 4.4% short interest.

Actionable Options Strategies: MXL gap filled its Q3 earnings gap back down. Bullish options investors enter on a pullback using cash-secured puts at the Fib pullback support levels or take a bullish call debit spread for less capital than owning the stock while minimizing the downside with capped upside gains.