MaxLinear: Why It Is In A Crapshoot At This Time (NASDAQ:MXL)

MaxLinear (NASDAQ:MXL), a supplier of analog, digital and mixed-signal integrated circuits, seemed to have put the worst behind it heading into 2024. The stock had after all rallied towards the end of 2023, raising optimism the long decline MXL found itself in was over. Yet MXL fell to new lows in August 2024 after temporary rallies all petered out. However, the stock has spiked higher in the last couple of days. Why will be covered next.

MXL drops and then comes back

A previous article from January 2024 was written when MXL was in the midst of a multi-month rally, following what appeared to be the bottom in October 2023. This may have been enough to convince some investors of the merits behind long MXL, but the article nonetheless rated MXL a hold after concluding that the slide in the stock may not yet be over for a variety of reasons, including a drop in demand that has been more severe than expected.

The chart above shows why the article was right to not buy into the rally due to the possibility of a further decline in the stock because that is exactly what happened with the stock losing around a third of its value since then and that’s with a recent rebound in the stock. MXL fell to new lows with big drops, most of it coming in July after the release of the Q2 FY2024 report when the stock fell off a cliff with a loss of 37.1% in one day.

However, while the stock hit a 52-weeks low of $11.08 on August 7, it has generally proceeded to move higher from that point on, especially recently. MXL has gained a combined 27.2% in value in the last two trading days. This allowed MXL to narrow losses for the year, although it is still down 36.1% YTD.

Why MXL has rallied in the past few days

The spike in the stock starting on August 29 did not happen by accident, but can be attributed to the decision of a federal judge to dismiss a lawsuit initiated by several investment funds against MXL. The lawsuit accused the latter of securities fraud because MXL allegedly misrepresented its intent to merge with Silicon Motion (SIMO).

Recall how MXL announced a proposed acquisition of SIMO in May 2022, a cash and stock transaction that valued the latter at $3.8B. However, gaining regulatory approval turned out to be time-consuming, which caused a lot of delay. MXL eventually received regulatory approval, but MXL then decided to terminate the agreement with SIMO in July 2023.

As one might imagine, the way this proposed acquisition evolved over time with its many twists and turns led to a lot of dissatisfaction among parties involved. This resulted in a number of pending lawsuits against MXL, including the aforementioned one. MXL could have been found liable for monetary damages, something that MXL cannot really afford in its present financial condition, on top of a downturn in demand that continues.

The stock was therefore relieved to hear the judge decided in MXL’s favor, which caused MXL to appreciate in market cap by more than a quarter in two days. On the other hand, it is worth pointing out that MXL still faces more legal action elsewhere. SIMO, for instance, is still looking for compensation from MXL after MXL terminated their agreement. MXL may have to pay SIMO, depending on what the courts decide.

The case is still pending. In addition, MXL may have to fend off more challenges in court. A number of law firms like BFA and BES are investigating potential violations of securities laws on the part of MXL. It is possible MXL could emerge victorious in all of these cases, but it is also possible MXL may be forced to pay damages to third parties. At the very least, the presence of pending lawsuits is likely to weigh on the stock.

Why did MXL drop to new lows in the first place?

The recent rally in the stock, in combination with the fact that the stock is priced at a fraction of what it used to go for, may cause some to hop on the train and go long MXL. On the other hand, while the recent court decision is a clear win for MXL, it needs reminding that MXL is still under legal scrutiny. Furthermore, while it may have gotten overshadowed by all the legal moves lately, it is worth mentioning that MXL also has to deal with unresolved issues elsewhere.

As mentioned earlier, the stock lost 37+% in one day not too long ago and that is because the most recent earnings report came in well short of expectations. The consensus was expecting MXL to announce a non-GAAP loss of $0.19 per share on revenue of $100M in Q2 FY2024, but MXL reported a loss of $0.25 per share, or $0.06 more than expected, on revenue of $91.99M.

Q2 FY2024 was the sixth consecutive quarter revenue declined QoQ and YoY, a sign of how MXL is very much in a deep slump in terms of demand. MXL finished Q2 FY2024 with cash and cash equivalents of $185.11M, partially offset by $122.68M of long-term debt on the balance sheet. The table below shows how the numbers have progressively gotten worse for MXL.

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Source: MXL

Guidance was also much worse than expected. The consensus expected MXL to guide for revenue of $112M in Q3 FY2024, which would have meant sequential growth, but guidance calls for Q3 FY2024 revenue of $70-90M, which is another contraction QoQ. Using the below guidelines from MXL, non-GAAP loss per share is estimated to come in at around $0.31-0.33 in Q3 FY2024.

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Source: MXL

What drove the weaker than expected results?

The latest numbers from MXL were much worse than expected, which is why MXL added some color to the numbers. From the Q2 earnings call:

“We are disappointed by the weakness in our broadband demand due to the prolonged burn-off of the excess customer inventory buildup during the supply chain crisis. We are also seeing continued softness in our telecom markets with added pressure from U.S.-China tensions and regulatory compliance requirement. This is impacting our ability to make shipments which affects our Q2 results and Q3 guidance. Despite the discouragingly slower business recovery than anticipated, multiple factors give us confidence that we are well-positioned to resume growth in ’25.

Source: MXL earnings call

Demand was weaker than expected and inventories were higher than desired, but a contributing factor behind the disappointing results were trade restrictions imposed on MXL by the U.S. government. Previously held licenses that allowed MXL to ship some goods to China’s Huawei were canceled, which adversely affected Q2 results and Q3 guidance.

Is MXL worth a shot at this point?

At the same time, MXL believes FY2025 could see a return to growth. Accordingly, while FY2024 is expected to end in the red, Wall Street estimates predict MXL will end FY2025 with a profit of between $0.32 at the low end to $0.64 at the high end of estimates, which translates to a P/E ratio of 31.6x at the midpoint with the current stock price of $15.18.

So MXL is expected to recover in the not too distant future. MXL is arguably due for a rebound in demand after spending the last two years or so in contraction. The stock price has gradually moved lower since peaking in late 2021/early 2022, so the stock price itself is arguably due for a change in direction. MXL after all has a number of products or in the pipeline that have the potential to drive growth.

The need for broadband is there, for example. There is a real need for faster network connections that can handle the volume of data expected to be moved in the years ahead, so that is something MXL could ride higher. MXL will have to face competition, but it is not as if there is no market out there for what MXL supplies.

One issue that needs more clarity is how MXL is dealing with the competition. MXL has many competitors and most, if not all of them, seem to be in a better position than MXL. Granted, it is possible they are further ahead in the curve, but it is possible MXL is losing out to the competition. This could be one explanation why MXL has done very poorly lately.

Note that competitors like Broadcom (AVGO) are much larger than MXL with many more products, so it is difficult to directly compare MXL with competitors head to head, even if there is some overlap. It is worth noting that the competition seems to be doing better than MXL, but it is too early to draw conclusions since there are other factors to consider.

A turnaround is possible, but there are also no guarantees it will play out as expected. Keep in mind MXL has been off before in its forward projections. Remember that MXL was earlier calling for sequential growth, which obviously did not pan out in light of the latest results and which likely played a role in the magnitude of the recent selloff. True, the Huawei situation was a spoiler, but there is no denying that MXL has been wrong before. Just something to keep in mind when MXL states it is well positioned for a return to growth in FY2025.

Investor takeaways

The stock has done very well lately, but it would not be prudent to ignore what happened beforehand. The rally of the last few days was triggered by a favorable court decision, but MXL still faces legal issues elsewhere. The court decision was a win for MXL, but it is not correct to conclude MXL is now in the clear.

Furthermore, while MXL seems to be optimistic about its prospects for growth, there is reason for some skepticism. MXL after all has been wrong before with its outlook. It is not impossible for MXL to be wrong again, which means Wall Street’s projections of a return to profit in 2025, which is predicated on MXL returning to growth, may also be inaccurate.

The road ahead for MXL is clouded by uncertainty. This affects both the bulls and the bears. On the one hand, shorting a stock like MXL is risky because the stock has already dropped by so much in the past few years. MXL has been wrong before, but if it is right to call for a return to growth next year, the stock could continue to rally. Shorts could find themselves in the worst position, which is going short at or close to the bottom.

On the other hand, long MXL is also a risky proposition since MXL may be confronted with further setbacks that could drive the stock lower, depending on, for instance, what the courts decide. Yes, demand is expected to rebound next year and that could power the stock higher, but it would not be prudent to ignore the fact that forward projections have been way off before and MXL has acknowledged that demand has been weaker than it anticipated.

I am therefore going with neither of the above options. Instead, I am neutral on MXL. Determining what will happen to MXL is pretty much a crapshoot at this time. The various legal challenges, for example, could go either way. The stock could get pushed in either direction, depending on the court’s decisions, but it is impossible to say for sure when and how the legal issues will be resolved.

MXL won one case and the stock spiked higher as a result in recent days, but that does not mean the opposite cannot happen in another case. Another decision could go against MXL, and that could send the stock lower. SIMO does seem to have a strong case against MXL, but it is up to the courts to come to a decision.

Bottom line, some may be willing to gamble on a particular outcome, and they may be rewarded for doing so, but they could just as easily get punished for it. If someone decides the risk of getting it wrong is too high for their liking with the way the cards are laid out, then not playing in the first place is probably best.